Monetary policy in Argentina: seigniorage and Bailey's curve 2001-2014

Abstract

Governments usually do not admit they are causing inflation deliberately. They try to take advantage of this situation, promoting populist actions. They issue money to fund increasing spending on subsidies and transfers, causing strong increases in prices with the consequent welfare loss. Funding fiscal deficits by issuing money (seigniorage) allow us asking ourselves why governments use seigniorage when they know that this action leads to a higher inflation. In trying to find the answer, we should distinguish the role of economic institutions by comparing the Central Bank behavior. The main hypothesis in this paper is that in countries as Argentina, with an inflationary long story, the rate of inflation needed to sustain a given long run fiscal deficit is higher than in developed economies. We analyze the monetary policy in Argentina and stress possible differences with the policy applied in other emerging economies of the European Union, particularly Turkey.