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Working paper

Бюджетные дефициты и эффекты обратной связи от инфляции

This paper contributes to the literature on budget deficits and inflation in high inflation economies. The main finding is that recurrent outbursts of extreme inflation in these economies can be explained by a certain hysteresis effect associated with public finance. This interpretation meets the evidence that dramatic shifts between regimes of moderately high and extremely high (hyper-) inflation often occur without visible deterioration in public finance or abrupt shifts in fiscal and monetary policies. The existence of the hysteresis effect is explicitly explained by the work of two mechanisms: the arithmetic associated with the wrong side of the inflation tax Laffer curve and the Patinkin effect (the reverse of the much more-cited Olivera-Tanzi effect). It is also shown that the division of the operational budget deficit into the part that is subject to negative inflation feedback and the inflation-proof part has implications for both the discussion of inflationary consequences of budget deficits and the proper design of stabilization policy.