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Government Deficits and the Inflationary Process in Developing Countries (Déficits publics et processus inflationniste dans les pays en développement) (Los déficit públicos y el proceso inflacionario en los países en desarrollo)

Author

Listed:
  • Bijan B. Aghevli

    (International Monetary Fund)

  • Mohsin S. Khan

    (International Monetary Fund)

Abstract

The purpose of this paper is to examine the relationship between increases in the money supply and inflation in four developing countries (Brazil, Colombia, the Dominican Republic, and Thailand) over the period 1961-74. It is first shown that the growth in the money supply and inflation are linked in a two-way relationship in these countries, and then a dynamic model is designed that explicitly introduces the link in the form of reactions of the government fiscal deficit to inflation. The basic hypothesis is that an increase in the rate of inflation, whatever its cause, increases the real value of the fiscal deficit, owing to the fact that money expenditures keep pace with inflation while nominal revenues tend to lag behind. The financing of this deficit increases the supply of money, thus generating further inflation. In this framework, one would expect to observe increases in the supply of money both causing inflation and, at the same time, being positively affected by it. The model is estimated for the four countries, and the empirical results tend to validate the hypothesis. In particular, it is found that fiscal deficits play an important role in the inflationary process, and that increases in these deficits are largely owing to the differences in the lags of government expenditures and revenues. Two basic policy conclusions emerge from this study: first, the tendency of government budgetary positions to be automatically destabilizing in developing economies underscores the need for an actively anti-inflationary fiscal policy in these economies. Second, developing countries should attach priority to tax reforms designed to eliminate revenue lags. /// Le présent document a pour objet l'étude de la relation qui existe entre augmentations de la masse monétaire et inflation dans quatre pays en développement (Brésil, Colombie, République Dominicaine et Thaïlande) pendant la periode 1961-74. Les auteurs montrent d'abord que la croissance de la masse monétaire et l'inflation dans ces pays sont liés par une relation de reciprocité; ils présentent ensuite un modèle dynamique qui fait ressortir de facon explicite le lien constitué par les réactions du déficit budgétaire de l'Etat à l'inflation. L'hypothèse fondamentale est qu'une augmentation du taux d'inflation, peu importe son origine, augmente la valeur réelle du déficit budgétaire, les dépenses nominales augmentant avec l'inflation alors que les recettes nominales prennent, en géneral, un certain retard. Le financement de ce déficit entraîne un accroissement de la masse monétaire qui alimente à nouveau l'inflation. Dans ces conditions, on s'attendra à ce que les augmentations de la masse monétaire soient à la fois une cause et une conséquence de l'inflation. Le modèle est estimé pour les quatre pays et les résultats empiriques tendent à confirmer l'hypothèse posée. On constate en particulier que les déficits budgétaires jouent un rôle important dans le processus inflationniste et que les augmentations de ces déficits sont imputables en grande partie aux différences qui interviennent entre les décalages des dépenses et ceux des recettes publiques. En matière de politique économique, deux conclusions fondamentales se dégagent de la présente étude. Premièrement, puisque les situations budgétaires de l'Etat sont en général automatiquement déstabilisantes dans les économies en développement, il est nécessaire d'y appliquer une politique budgétaire hautement anti-inflationniste. Deuxièmement, les pays en développement devraient accorder la priorité aux réformes fiscales qui visent à éliminer les décalages enregistrés par les recettes. /// El presente trabajo tiene por objeto analizar la relación entre el crecimiento de la oferta monetaria y el de la inflación en cuatro países en desarrollo (Brasil, Colombia, República Dominicana y Tailandia) durante el período 1961-74. Se demuestra en primer término que en esos países existe una relación recíproca entre el incremento de la oferta monetaria y el de la inflación, y se formula luego un modelo dinámico que introduce explícitamente dicha relación bajo la forma de reacciones del déficit fiscal público ante la inflación. Se parte de la hipótesis básica según la cual un aumento de la tasa de inflación, de cualquier origen que sea, hace subir el valor real del déficit fiscal, debido a que en tanto que el gasto nominal corre parejas con la inflación el ingreso nominal tiende a retrasarse. El financiamiento del déficit eleva la oferta monetaria, con lo cual se genera más inflación. En este contexto, es dable suponer que los aumentos de la oferta monetaria no sólo provocarán inflación sino que, a la vez, serán afectados positivamente por ella. El modelo se aplica a los cuatro países y los resultados empíricos por lo general confirman la hipótesis. En especial, se determina que los déficit fiscales desempeñan una función importante en el proceso inflacionario y que los incrementos de esos déficit obedecen en gran medida a las diferencias entre los desfases del gasto y el ingreso públicos. De este estudio surgen dos conclusiones fundamentales para la formulación de políticas. En primer lugar, dada la tendencia que en las economías en desarrollo tiene la situación presupuestaria pública a ser automáticamente desestabilizadora, resulta evidente la necesidad de implantar una política fiscal antiinflacionaria enérgica en esos países. En segundo lugar, los países en desarrollo deben conceder prioridad a las reformas tributarias destinadas a suprimir los desfases de los ingresos fiscales.

Suggested Citation

  • Bijan B. Aghevli & Mohsin S. Khan, 1978. "Government Deficits and the Inflationary Process in Developing Countries (Déficits publics et processus inflationniste dans les pays en développement) (Los déficit públicos y el proceso inflaciona," IMF Staff Papers, Palgrave Macmillan, vol. 25(3), pages 383-416, September.
  • Handle: RePEc:pal:imfstp:v:25:y:1978:i:3:p:383-416
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    Citations

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    Cited by:

    1. Ansari, M. I., 1996. "Monetary vs. fiscal policy: Some evidence from vector autoregression for India," Journal of Asian Economics, Elsevier, vol. 7(4), pages 677-698.
    2. Vegh, Carlos, 1991. "Stopping High Inflation: An Analytical Overview," MPRA Paper 20175, University Library of Munich, Germany.
    3. Sebastian Edwards, 1982. "The Relation Between Growth and Inflation in Latin America," UCLA Economics Working Papers 235, UCLA Department of Economics.
    4. Fazal Husain & Tariq Mahmood, 1998. "Causality between Money and Prices: Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 37(4), pages 1155-1161.
    5. Ashra, Sunil & Chattopadhyay, Saumen & Chaudhuri, Kausik, 2004. "Deficit, money and price: the Indian experience," Journal of Policy Modeling, Elsevier, vol. 26(3), pages 289-299, April.
    6. Khundrakpam, Jeevan K. & Goyal, Rajan, 2009. "Is the Government Deficit in India Still Relevant for Stabilisation?," MPRA Paper 50905, University Library of Munich, Germany.
    7. Sebastian Edwards, 1983. "The Short-Run Relation Between Inflation and Growth in Latin America," NBER Working Papers 1065, National Bureau of Economic Research, Inc.
    8. Abul M. M. Masih & Rumi Masih, 1997. "Bivariate and Multivariate Tests of Money-Price Causality: Robust Evidence from a Small Developing Country," Journal of International Development, John Wiley & Sons, Ltd., vol. 9(6), pages 803-825.
    9. Ali Hossein Samadi, 2006. "The Twin Deficits Phenomenon in Some MENA Countries," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 11(2), pages 129-140, spring.

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