ABSTRACT
The paper analyses the relationships among inflation, inflationary tax, and public deficit for the Brazilian economy during the eighties. Initially, these relationships are described somehow simplistically using the so-called inflation tax model. The working hypothesis are (1) there is an absolute limit to the government’s deficit financing by inflationary tax; (2) a given amount of inflationary tax can be collected at an either high or low rate of inflation and (3) the inflationary tax collected by the government depends on the monetary conditions of the economy. Using this analytical framework, a simulation exercise is carried out to estimate the inflation-tax finance of the public deficit for the Brazilian economy during the period 1982-88. The main conclusions are: (1) the conditions of the inflationary tax finance changes after 1986, when the focus of the economic policy shifts from the conventional orthodoxy to what is called the heterodox approach; (2) the accelerating inflation has radically weakened the ability of the government to collect inflationary tax and (3) under these conditions price freezes and exchange rate fixing may be considered necessary to ensure a transition from a high to a low level of inflation.
KEYWORDS:
Inflation; inflation tax
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