Stopping high Inflation: what the world learned from Latin America

Transcription

1 Stopping high Inflation: what the world learned from Latin America ECON 3235 Economics of Latin America Lecture notes Fall 2017 September 25 th, 2017 Darryl McLeod, Fordham University

2 Latin America has long history of inflation, some key policy innovations 1. Exchange rate based stabilization programs need not rely on deep recessions (austerity) see Calvo and Vegh, 1994 for a summary 2. Price data (inflation) can now be gather online or from via crowd sourcing (people with phones)? 3. Primary deficit target is immune to inflation s affect on interest rates was pioneered in Brazil 4. Flexible Fx rate regimes compatible with inflation targeting: fear of floating overcome first in LatAm: Brazil, Chile, Mexico, Peru & now Arg. 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 2

3 MIT Billion Prices Project starts inflacionverdadera.com in /12/2017 LatAM 3235 Fall 2017 Lecture notes 3

4 MIT Billion Prices Project see inflacionverdadera.com 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 4

5 LatAm inflation now in single digits in all but two countries 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 5

6 Argentina inflation is worse than IMF/WB or government says it is Argentina s inflation problem The price of cooking the books Economist Feb 25th 2012 BUENOS AIRES print edition 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 6

7 Why has inflation been such a persistent problem for Latin America? 1. Is inflation a symptom of bad fiscal policy, bad luck or lack of a credible & independent Central bank? 2. How does inflation affect the poor vs. the rich does reducing inflation also reduce inequality? 3. How much inflation is too much? All but 2 LatAm ctys are in single digits, Argentina and Venezuela have 20-30%, why is this too high? 4. Does inflation reduce or increase growth? What is the best inflation rate, 0%, 2%, 4-5% what is 10/12/2017 good about having LatAM some 3235 Fall 2017 Lecture inflation? notes 7

8 Hyperinflation: a traumatic social and economic collapse 1. What is hyperinflation: Classic Cagan money demand is 50% per month, that is over 12500% annual inflation (take and subtract one). 2. See Vegh, Carlos (1992), Stopping High Inflation: An Analytical Overview, International Monetary Fund Staff Papers, vol. 39, pp /12/2017 LatAM 3235 Fall 2017 Lecture notes 8

9 How did Latin America defeat high inflation (especially Brazil & Chile)? a) With Orthodox IMF Chicago boys reduction of money growth (is inflation always and everywhere a monetary phenomenon )? b) With anti-orthodox wage and price controls? c) By managing expectations? (the Tablita?) d) By reducing fiscal deficits and hence the need for seigniorage revenues? E) all of the above? 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 9

10 How did Latin America defeat the high inflation dragon 1. Orthodox Money based: 2. Heterodox Exchange based: 3. Neo-conservative Chicago boys shock treatment why Milton Friedman was wrong, -- Money not key, managing expectations (Tablita was right idea) and indexation is not a good idea -- Rapid liberalization of finance and trade is very dangerous (CDOs and Wall Street ) -- Free trade does not stop inflation, nontraded goods still rise in price (real estate boom) 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 10

11 How did Latin America defeat the high inflation dragon 2. Heterodox Exchange based: dangerous but effective in democracies -- Fx rate is key to managing expectations: Tablita great idea, but not enough wage & price control -- Fiscal adjustment is key, fiscal illusion is danger, Talvi and Olivera-Tanzi effects -- Tight money is a bad idea raises real interest rates invites speculative capital flows -- Inflation ends with a boom not a bust, great for democratic leaders: e.g., Menem and Cardoso 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 11

12 Neo-conservative Chile Program output and inflation declined , inflation declined output rose Deep recession due to banking and balance of payments crisis, see Diaz-Alejando 4. Unemployment rose to over 20% in early 1980s, not a model stabilization program. 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 12

13 Views of inflation Cardoso & Helwege, /12/2017 LatAM 3235 Fall 2017 Lecture notes 13

14 At high rates of inflation, money demand falls (velocity rises) reducing seigniorage revenues Standard monetarist money demand equation M d v(π) = PQ where PQ is P times Q And v is velocity of Money (typicall M1 or M2) and PQ is nominal GDP so money demand is, M d = (PQ)/v(π) money demand & seigniorage rise with P, up to a point, then HH and business get rid of money faster so v rises with inflation, π leading to the inflation Laffer curve shown below the Central bank controls H (high powered money ) 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 14

15 At high rates of inflation, money demand falls (velocity rises) reducing seigniorage revenues 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 15

16 We can see this inflation laffer curve in the Argentine data (C&H p. 157) 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 16

17 The inflation Laffer curve in Argentine data (From C&H, p.153) 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 17

18 Latam Stbz Lessons: many failures then success in all but Argentina and Ven 1. Inflation tax is regressive & destabilizing, falling more on the cash using poor and informal sector 2. Orthodox programs fail because of deep recession & ending of popular subsidies political/populist backlash very dangerous Venezuela in 1990s, Argentina now? 3. Heterodox/neo conservative programs fail because of balance of payments crisis, see handout 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 18

19 Latam Stbz Lessons: what explains Heterodox Success? 1. Fiscal Adjustment is the orthodox key to Heterodox success 2. However, must be real not illusory fiscal adjustment: Talvi effect (higher VAT collections due to consp boom) and Olivera-Tanzi effect (real tax revenues rise when inflation falls) 3. Key is to reduce the Primary deficit (inflation adjusted deficit ) 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 19

20 Primary deficit excludes interest payments, a reduction in inflation reduces deficit, still need primary surplus to stablize 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 20

21 Latam Stbz Lessons: Brazil, Arg and NIC had hyperinflation. Which is? 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 21

22 Latam Stbz Lessons: Brazil, Arg and NIC had hyperinflation. Which is? 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 22

23 Interesting Latin Americans Eva (and Juan) Peron Fernando Enrique Cardoso (talk at the Clinton Foundation) Michelle Bachelet (Beyond equal rights) Dilma Rousseff (before she was President ) Subcomandante Marcos Ernesto Zedillo, Accidental but pivotal Mexican President Camila Vallejo (Chilean student movement) Naomi Klein (Canadian Shock Doctrine, TED ) 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 23

24 Films about/from Latin America Commanding Heights The Agony of Reform South of the Border (Oliver Stone, 2010) Fitzcaraldo (Werner Herzog) The Carbon Hunters (PBS Frontline) The Burning Season (the Chico Mendes Story) Evita Motorcycle Diaries 10/12/2017 LatAM 3235 Fall 2017 Lecture notes 24