Virtual Deficits and the Patinkin Effect

Author/Editor:

Eliane A. Cardoso

Publication Date:

March 1, 1998

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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. 98/41

Subject:

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

Format:

Paper

Pages:

40

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