The role of fiscal policy in inertially inflated Argentina

Inflation has been the dominant economic variable in Latin American during the 1980's. Moreover, it is generally accepted that fiscal imbalance is the ultimate source of price instability. This dissertation provides a game-theoretic model of the social conflict theory of inflation and creates cyclical indices of fiscal stance for developing countries suffering from inertial inflation.In the first essay we create an index of fiscal stance for inertially inflated economies. A zero inflation borrowing requirement (ZIB) is introduced which corrects deficit figures for the inflationary component of interest payments, and the inflationary erosion of tax revenue (the Olivera-Tanzi effect). The ZIB is applied to Argentine data in order to evaluate the claim that the Argentine deficit is inflation-induced, rather than due to structural or policy shortcomings.In the second essay a game-theoretic model is presented which formalizes the role of deficits in the conflict theory of inflation. The game strikes a balance between orthodox and structural theories of inflation. In it, the Central Government is endogenous, and special interests are unable to form the coalitions necessary to temper their combined fiscal demands. Moreover, the game provides a natural framework for analyzing the criteria for successful implementation of the type of heterodox stabilization policies employed in Latin America in the 1980's.The third essay is an initial investigation into indices of fiscal stance which are consistent with the social conflict theory of inflation. Estimates are made for a hybrid of the cyclically neutral budget which reflects a macroeconomic target of income maintenance, rather than output gap minimization. The results suggest that Argentine fiscal stance has been tighter than previously believed.Taken together, the three essays reinforce the view that when inflation is a function of social conflict, standard or "orthodox" approaches to stabilization may be fatally flawed because the link between deficits and inflation is shown to be weak and/or misunderstood. Stabilization in a conflict society requires a mechanism to reduce social tensions through a legitimate system of distributing income shares, inflationary costs, and the costs of allocative efficiency.U of I OnlyETDs are only available to UIUC Users without author permissio