Monetary policy in an inflationary economy - Argentina since the Austral plan

Abstract

The worsening of the Argentine inflationary process since 1981 has been reflected in a greater understanding of its mechanisms and relevant variables. Topics such as the crucial role of internal public debt, the quasi-fiscal deficit of the Central Bank and the economic agents expectations are today widely accepted by analysts and even by the design of economic policies. However, the theoretical modeling and empirical estimation efforts of the period analyzed have not, in general, accompanied the development of the experiences learned so far this decade. In particular, the use and estimation of monetary models characterized by the presence of Cagan-type “money flight” have been opposed to fundamentally inertial explanations of the price level. We could affirm that the development of a general equilibrium model where the salient aspects of this modeling are combined with the characteristics of the Argentine economy after the Austral Plan is an unmet need. The present article aims to advance in the development of a model that can answer the main questions of monetary policy as it has been implemented in Argentina since mid-1985. In this sense, aspects such as the remuneration of the internal public debt, compulsive reserve requirements for the financial system and the evolution of rediscounts to banks are taken into account. The model is presented in terms of stocks and not flows given that in the inflationary process, goods are viewed as a portfolio alternative that avoids the inflation tax. On the other hand, the emphasis is on the consistency that the demands for money, goods and deposits must verify among themselves. The model allows analyzing the effects of different monetary policies and instruments and provides a satisfactory explanation of the requirements to be met to achieve price stability.

JEL classification: E31 ; E52 ; E63