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

Abstract

The monetarist-structuralist controversy, which was in full swing at the turn of the decade in Latin America, appears to be now well past its climax, and the prevailing view is that a combination of both real and monetary causes are responsible for the graver instances of continuing inflation. There is, however, one limitation which both strands of thought have in common, which cannot be removed by simply lumping them together. Both conceptions tend to underrate, if not disregard entirely, the part of mere inertia in the process of chronic inflation. In fact, the elements of inertia may be strong from the outset, and are certain to become stronger and more refractory as inflation moves on. The present article, rather than considering any general-inertia model, focuses on a specific element of inertia, derived from the fiscal system. The author demonstrates how a general price expansion is liable to originate a certain amount of “passive” fiscal deficit and examines the relevant features of an inflationary spiral that may ensue from this.

JEL: E31, E40, E62