TITLE

What Policymakers Can Learn from Brazil and Mexico

AUTHOR(S)
Cardoso, Eliana A.
PUB. DATE
September 1986
SOURCE
Challenge (05775132);Sep/Oct86, Vol. 29 Issue 4, p19
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
Sustained inflation is always accompanied by monetary expansion. This observation has raised the hypothesis that monetary expansion causes inflation. The most common channel links money printing to government deficits. The link ranges from the obvious, such as money issued to finance a war, to more roundabout stories, that include exchange-rate collapses. The inflation story of the eighties starts with a government with a large external debt. All of a sudden it is deprived of foreign capital inflows to finance interest payments and that part of deficits not due to interest payments. Because of insufficient taxes, this government is then forced to extract from the private sector the foreign exchange resources it needs either by money creation or increased domestic debt. To produce the trade surplus and the needed exchange resources, the exchange rate is greatly depreciated. The devaluation increases the cost of the debt service in domestic currency, further augmenting government expenditures. Deficit finance inevitably leads to two types of vicious circles. First, if public-sector prices are adjusted with delays and income taxes are collected with a lag, inflation itself increases the budget deficit, inducing even larger increases in money. Second, the public in response to inflation shifts out of money into goods further increasing inflationary pressure.
ACCESSION #
6148749

 

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