Virtual Deficits and the Patinkin Effect
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Summary:
The paper develops a model of inflationary finance that defines the fiscal deficit as a function of the virtual deficit—a deficit that would be observed if inflation were zero. It studies the negative relationship between the inflation rate and real government expenditures—the Patinkin effect. The model outperforms others in explaining four-digit inflation rates that never explode into hyperinflation. It also explains how apparently expansionist fiscal policies end in real deficits that are small and compatible with the small amount of seigniorage that can be collected at high inflation rates. Finally, it applies the model to the case of Brazil.
Series:
Working Paper No. 1998/041
Subject:
Budget planning and preparation Expenditure Financial services Government debt management Inflation Prices Public financial management (PFM) Real interest rates
Notes:
Also published in Staff Papers, Vol. 45, No. 4, December 1998.
English
Publication Date:
March 1, 1998
ISBN/ISSN:
9781451846072/1018-5941
Stock No:
WPIEA0411998
Pages:
40
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