Money, prices and fiscal lags: a note on the dynamics of inflation

Abstract

The author examines the monetarist-structuralist debate regarding inflation in South America and argues that both positions are limited in their scope. Moreover, the prevailing tendency to rely on a hybrid of the two is not adequate to make up for this limitation. This is because both conceptions tend to underrate, if not to disregard entirely, the part of inertia in the process. While the most familiar source of inflationary inertia is the anticipation of new prices, the more dangerous is built-in inertia arising from objective circumstances. In this regard the author spotlights a specific element of inertia, derived from the fiscal system. Due to a variety of factors, government expenditure generally follows the rise of the price level more rapidly than does government income. Thus, a general price expansion is liable to originate a certain amount of “passive” fiscal deficit. The author explores this hypothesis through a model that is not intended to replace the monetary or structural interpretations or any mixture of the two, but rather seeks to shed light on some interesting and relevant features that have previously escaped scrutiny and may be of use in identifying certain relevant factors.

Keywords

• Money
• prices
• fiscal lags
• dynamics
• inflation