Inflationary tax: an analysis for the Brazilian economy

The paper analyses the relationships among inflation, inflationary tax, andpublic deficit for the Brazilian economy during the eighties. Initially, these relationships aredescribed somehow simplistically using the so-called inflation tax model. The working hypothesisare (1) there is an absolute limit to the government’s deficit financing by inflationarytax; (2) a given amount of inflationary tax can be collected at an either high or low rate ofinflation and (3) the inflationary tax collected by the government depends on the monetaryconditions of the economy. Using this analytical framework, a simulation exercise is carriedout to estimate the inflation-tax finance of the public deficit for the Brazilian economy duringthe period 1982-88. The main conclusions are: (1) the conditions of the inflationary taxfinance changes after 1986, when the focus of the economic policy shifts from the conventional orthodoxy to what is called the heterodox approach; (2) the accelerating inflation hasradically weakened the ability of the government to collect inflationary tax and (3) underthese conditions price freezes and exchange rate fixing may be considered necessary to ensurea transition from a high to a low level of inflation. JEL Classification: E31.