IDEAS home Printed from
   My bibliography  Save this paper

Unstable inflation and seignorage revenues in Latin America : How many times can the government fool people?


  • Morisset, Jacques
  • DEC


In the past 20 years, high and extremely volatile inflation rates in Latin America have generally been associated with unstable monetary policies and the (temporary) use of inflationary revenues to finance fiscal deficits. There seems to be a consensus that high inflation is bad for economic development and growth, so it is unclear why governments have adopted unstable monetary policies they have known to be unsustainable in the long run. This paper argues that Latin America governments have followed unstable monetary policies principally to maximize their inflationary revenues. Explanations based on irrationality or on institutional and political shock are only partially convincing. A government maximizes inflationary revenues by adopting temporary unstable monetary policies because people tend to revise their expectations (slower) faster in periods of (dec-) accelerating inflation as the cost of collecting information (rises) falls compared with other welfare losses. When the rate of inflation is relatively high, a restrictive monetary policy is implemented so people can reconstitute monetary balances. When the inflation rate is low, an expansive monetary policy is adopted to confiscate existing real balances. Governments may appear for some time to succeed in fooling people, by adopting temporary reforms and restoring confidence, but their reputation is damaged when they repeatedly do so. Utlimately, private agents react so quickly and with such sophistication that even small fiscal gaps produce precipitous declines in money demand. Over time, private agents learn to anticipate the relationship between unstable inflation and monetary policy and progressively reduce their real monetary balance. In the end, the optimal inflation rate tends toward its steady-state value, as Friedman found 20 years ago. The author develops a small dynamic model to stylize these facts and applies it to Argentina.

Suggested Citation

  • Morisset, Jacques & DEC, 1994. "Unstable inflation and seignorage revenues in Latin America : How many times can the government fool people?," Policy Research Working Paper Series 1287, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1287

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Easterly, William & Kremer, Michael & Pritchett, Lant & Summers, Lawrence H., 1993. "Good policy or good luck?: Country growth performance and temporary shocks," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 459-483, December.
    2. Landau, Daniel, 1993. "The economic impact of military expenditures," Policy Research Working Paper Series 1138, The World Bank.
    3. Barro, Robert J. & Lee, Jong-Wha, 1993. "International comparisons of educational attainment," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 363-394, December.
    4. Desai, Padma, 1976. "The Production Function and Technical Change in Postwar Soviet Industry: A Reexamination," American Economic Review, American Economic Association, vol. 66(3), pages 372-381, June.
    5. Bergson, Abram, 1979. "Notes on the production function in Soviet postwar industrial growth," Journal of Comparative Economics, Elsevier, vol. 3(2), pages 116-126, June.
    6. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    7. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    8. Easterly, William, 1993. "How much do distortions affect growth?," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 187-212, November.
    9. Robert Summers & Alan Heston, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950–1988," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 327-368.
    Full references (including those not matched with items on IDEAS)


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1287. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.