Virtual Deficits and the Patinkin Effect

March 1, 1998

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Eliane A. Cardoso Virtual Deficits and the Patinkin Effect, (USA: International Monetary Fund, 1998) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper develops a model of inflationary finance that defines the fiscal deficit as a function of the virtual deficit—a deficit that would be observed if inflation were zero. It studies the negative relationship between the inflation rate and real government expenditures—the Patinkin effect. The model outperforms others in explaining four-digit inflation rates that never explode into hyperinflation. It also explains how apparently expansionist fiscal policies end in real deficits that are small and compatible with the small amount of seigniorage that can be collected at high inflation rates. Finally, it applies the model to the case of Brazil.

Subject: Budget planning and preparation, Expenditure, Financial services, Government debt management, Inflation, Prices, Public financial management (PFM), Real interest rates

Keywords: Budget deficit, Budget planning and preparation, Fiscal deficits, Government consumption expenditure, Government debt management, Inflation, Inflation inertia, Inflation rate, Inflation stabilization, Money growth, Patinkin effect, Rate of inflation, Real interest rates, Reserve requirement, Revenue-maximizing inflation rate, Reverse Tanzi effect, Seigniorage, Stabilization, Steady-state inflation rate, Virtual budget deficit, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1998/041
Stock No:

WPIEA0411998
ISBN:

9781451846072
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 45, No. 4, December 1998.

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