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Virtual Deficits and the Patinkin Effect

Author

Listed:
  • Eliana Cardoso

    (International Monetary Fund)

Abstract

The paper develops a model of inflationary finance that defines the fiscal deficit as a function of the virtual deficit--one that would be observed at zero inflation. It studies the negative relationship between the inflation rate and real government expenditures--the Patinkin effect--a powerful stabilizer during megainflation. The model outperforms other seigniorage models in explaining the persistence of four-digit inflation rates that never explode into an open hyperinflation. It also explains how apparently expansionist fiscal policies end in measured real deficits that are small and compatible with the small amount of seigniorage that can be collected at high inflation rates.

Suggested Citation

  • Eliana Cardoso, 1998. "Virtual Deficits and the Patinkin Effect," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 619-646, December.
    • Handle: RePEc:pal:imfstp:v:45:y:1998:i:4:p:619-646
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    Citations

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    Cited by:

    1. Pekarski, Sergey, 2011. "Budget deficits and inflation feedback," Structural Change and Economic Dynamics, Elsevier, vol. 22(1), pages 1-11, February.
    2. Erik Hjalmarsson & Pär Österholm, 2010. "Testing for cointegration using the Johansen methodology when variables are near-integrated: size distortions and partial remedies," Empirical Economics, Springer, vol. 39(1), pages 51-76, August.
    3. Santiago HERRERA & Fernando BLANCO, 2010. "The Quality of Brazilian Fiscal Adjustment, 1999 - 2001," EcoMod2004 330600066, EcoMod.
    4. Nauro F. Campos & Armando Castellar Pinheiro & Fabio Giambiagi & Maur??cio M. Moreira, 2002. "Does it Take a Lula to go to Davos? A Brief Overview of Brazilian Reforms, 1980-2000," William Davidson Institute Working Papers Series 2003-580, William Davidson Institute at the University of Michigan.
    5. Enrique Alberola & Manuel Montero, 2006. "Debt Sustainability and Procyclical Fiscal Policies in Latin America," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2006), pages 157-193, August.
    6. António Afonso & José Alves & Olegs Matvejevs & Olegs Tkacevs, 2023. "Fiscal Sustainability and the Role of Inflation," Working Papers REM 2023/0303, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    7. Seghezza, Elena, 2022. "The Cagan's Model, its Developments, and the Patinkin Effect," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 75(4), pages 601-622.
    8. Stanley Fischer & Ratna Sahay & Carlos A. Végh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
    9. Salar, Laleena & Zaman, Khalid & Khilji, Bashir Ahmad & Khan, Muhammad Mushtaq & Lodhi, Mohammad Saeed, 2013. "The consequences of revenue gap in Pakistan: Unveiling the reality," Economic Modelling, Elsevier, vol. 30(C), pages 281-294.
    10. Teles, Vladimir Kuhl & Cardoso, Eliana A., 2010. "A brief history of Brazil's growth," Textos para discussão 241, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    11. Karsten Staehr & Olegs Tkacevs & Katri Urke, 2023. "Fiscal performance under inflation and inflation surprises: evidence from fiscal reaction functions for the Euro Area," Bank of Estonia Working Papers wp2023-3, Bank of Estonia, revised 20 Jun 2023.

    More about this item

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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