Date of Original Version

1993

Type

Article

Abstract or Description

There is no "monetarist position" on the budget deficit. Monetarism is mainly about the effects of money on inflation. Deficits have an effect on inflation—defined as the maintained rate of price change—only if they are financed by issuing money. Argentina, Bolivia, and Brazil are recent examples of inflations financed by money issued to pay for government spending. In these or other countries with budget deficits equal to 15 per cent of GNP or more, people observe that the government is unwilling to raise taxes or reduce spending; they expect inflation, so they resist holding domestic money. There is a flight from money, rapid money growth, and rising inflation. When the budget deficit was reduced Argentina and Bolivia were able to reduce money growth and inflation.

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Published In

Choices, 8.