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Leonardo Vera
JANUARY 2003
The Consumer Price Index is calculated from a market basket of consumer goods and services
Occasionally it gets out of control: After World War I, for instance, in Germany money as so little value that a weeks wages had to be transported in a wheelbarrow. In Mxico, in periods of high inflation people bought new cars a put them on blocks because they retained their value reasonable well.
485 percent
Argentina
3,080 percent
500
1984 Bolivia 11,750 percent 1987 1990 1993 1996 1999 2002 0 1981 3500 3000 2500 2000 1500 1000 500 1984 1987 1990 1993 1996 1999 2002 0 1981 50 45 40 35 30 25 20 15 10 5 0 1981 1984 1987 1990 1993 1996 1999 2002 Brazil 2,948 1984 1987 1990 1993 1996 1999 2002
Colombia 32 percent
1990
1993
1996
1999
2002
1984
1987
1990
1993
1996
1999
2002
140
120 100 80 60 40 20
Mexico
132 percent
Peru
7,486
0 1981
1984
1987
1990
1993
1996
1999
2002
1984
1987
1990
1993
1996
1999
2002
Source: IMF,
Based on the inflationary experiences in the southern cone, a strong debate started in the 1950s between two school of thought, the so-called monetarists and the structuralists. The debate was enriched over the years by the New Monetarists (Rational Expectations School) and the Inertialists (or New Structuralists). The debate have focused on the theoretical causes of inflation and its appropriate solution
Loss of International Reserves (if a fixed ER regime operates) or Exchange Rate Adjustment (in a flexible ER
system)
Inflation
(as a result of the excess of money)
Financing persistent budget deficit by money creation leads to sustained 1. Deficit financed by Ms leads to AD shifts out 2. If deficit persists, Ms continually and get P continually, i.e., as Conclusion: Deficit , only if it is 1. Persistent 2. Financed by money creation rather than by bonds
Most Known Exponents: Osvaldo Sunkel, Julio Olivera, Dudley Seers, Lance Taylor, Edmar Bacha.
Interpretation External Sector Vulnerability: Fall in the
Terms of Trade, The Need of Key Imports, Increase in the Debt Service, Sudden Stops of Capital Flows
ER Depreciation or Devaluation
Price and Wage Increases
POLICY RECOMMENDATIONS
Monetarists (a) Fiscal Adjustment (b) Limits to Money Creation (c) Liberalization or a freeing of markets from Government Intervention
Structuralists
(a) Government Investment in Key Sectors (b) Industrial Policy (c) Income Policies
INERTIA
During the 1980s and 1990s New Structuralists have emphasized the role of Inertia in the propagation and chronic behaviour of Inflation In LA countries sometimes contracts are written to include an adjustment for inflation (indexation) Formal indexation is usually backward looking. Wages, prices and contracts are adjusted for past inflation Also the shortening of the interval for adjustment of wages, prices, public sector prices and the exchange rate appears as inflation increases.
Inertialists claim that these two factors (indexation and the shortening of the intervals of price adjustments) will not allow drastic fiscal adjustment or fixed exchange rates to stop inflation rapidly. There is some inertia and the costs in terms of output can be severe.
Strong adjustment of the peso followed by smalls and decreasing over time adjustments in the exchange rate
Guidelines for wage and price adjustments (voluntary agreements monitored by the three parties: business, labour and the government) Tariff reduction and trade liberalization Inflation diminished slowly and the costs in terms of output were low
Phase Three, was the transformation of URV into At the end of June 1994 inflation was running at the astonishing rate of 7,000% the Real . In took place in June after relative prices were aligned. per year. Severe problems in the fiscal front and the external sector. Inflation declined drastically
211 228 58 366 993 1765 2360 421 989 2086 2312 75 11 8