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Sources of inflation and the effects of balanced budgets and inflation targeting in developing economies

Author

Listed:
  • Guilherme Klein Martins

    (University of Massachusetts Amherst, USA)

  • Peter Skott

    (University of Massachusetts Amherst, USA)

Abstract

This paper presents a model of inflation in developing economies and uses it to evaluate macroeconomic policy in those countries. We see cross-sectoral interactions between demand and supply side forces as central and show that the standard macroeconomic policy recommendations of inflation targeting and balanced budgets (i) increase volatility by amplifying external shocks and (ii) can lead to premature deindustrialization. The analysis applies to economies with marked underemployment, a central feature of developing and emerging countries. The recent Brazilian experience is used to illustrate the argument.

Suggested Citation

  • Guilherme Klein Martins & Peter Skott, 2020. "Sources of inflation and the effects of balanced budgets and inflation targeting in developing economies," UMASS Amherst Economics Working Papers 2020-08, University of Massachusetts Amherst, Department of Economics.
    • Handle: RePEc:ums:papers:2020-08
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    File URL: https://scholarworks.umass.edu/econ_workingpaper/291/
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    Cited by:

    1. Paul Auerbach & Peter Skott, 2021. "Visions of the future – a socialist departure from gloom?," PSL Quarterly Review, Economia civile, vol. 74(298), pages 155-177.
    2. Christian P Pinshi, 2022. "Ciblage des prévisions d'inflation : Un nouveau cadre pour la politique monétaire ?," Working Papers hal-03548273, HAL.
    3. Adam Aboobaker, 2022. "Macroeconomic Determinants of South Africa's Post-Apartheid Income Distribution," World Inequality Lab Working Papers halshs-03693225, HAL.
    4. Guilherme Klein Martins & Fernando Rugitsky, 2021. "The Long Expansion and the Profit Squeeze: Output and Profit Cycles in Brazil (1996–2016)," Review of Radical Political Economics, Union for Radical Political Economics, vol. 53(3), pages 373-397, September.
    5. Wildauer, Rafael & Kohler, Karsten & Aboobaker, Adam & Guschanski, Alexander, 2023. "Energy price shocks, conflict inflation, and income distribution in a three-sector model," Energy Economics, Elsevier, vol. 127(PB).
    6. Adam Aboobaker, 2022. "Macroeconomic Determinants of South Africa's Post-Apartheid Income Distribution," Working Papers halshs-03693225, HAL.
    7. PINSHI, Christian P., 2022. "Inflation-Forecast Targeting: A New Framework for Monetary Policy?," MPRA Paper 111709, University Library of Munich, Germany.
    8. Ugurlu, Esra Nur, 2023. "Sectoral implications of policy induced household credit expansions," Structural Change and Economic Dynamics, Elsevier, vol. 67(C), pages 14-31.

    More about this item

    Keywords

    inflation targeting; Dutch disease; overvaluation; commodities boom; Washington consensus;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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