Myths and certainties about inflation

The interest rate sets a floor for price increases. The level of the rate is one of those multiple causes which explain inflation and which has remained unscathed not only in economic policies, but even in public debate. Perhaps because it would imply directly discuss return on capital.

Of course, it is desirable that public expenditure be low because there is an efficiently functioning market without failures; zero deficit because taxes are consistent with the level of expenditure; and ordered accounts because it is not necessary to resort to issuance. Corn what is desirable cannot be the enemy of what is necessary.

Public expenditure

The international comparison shows that in 2020, the 10 countries with the highest rates public expenditure as a percentage of GDP were France (62.44%), Greece (60.69%), Belgium (60.18%), Norway (58.36%), Austria (57.87%), Italy (57.29%), Finland (58.68%), Denmark (53.99%), Canada (53.28%) and Sweden (52.92%). List similar to 2019, but with higher percentages due to the Covid crisis. Well above what Argentina allocated (43.07%)

Inflation in these countries was -0.02% in France, -1.26% in Greece, 0.41% in Belgium, 1.29% in Norway, 1.38% in Austria, -0.0, 13% in Italy, 0.23% in Finland, 0.49% in Denmark, 0.71%. percent in Canada and 0.49 percent in Sweden. While for Argentina, it was 36.1%.


Among the countries with the highest rates public deficit as a percentage of GDP in 2020, the United States (-14.85%), Brazil (-13.37%), India (-12.78%), the United Kingdom (-12.53%), the Spain (-10.95%), Canada (-10.88%), Greece (-10.10%), Italy (-9.60%), Belgium (-9.40%) and France (-9.10%). Above Argentina’s -8.50%. However, inflation in these countries was 1.4% in the United States, 5.5% in Brazil, 6.6% in India, 0.8% in the United Kingdom, -0.5% in Spain, 0.71% in Canada, -1.26% in Greece, -0.13%. % in Italy, 0.41% in Belgium and -0.02% in France.


The countries with the highest global tax burden as a percentage of GDP in 2020, these were Denmark (47.40%), France (47.30%), Belgium (45.40%), Sweden (43.30%), Italy (42.80%), Austria (42.40%), Finland (42.10%), Germany (41.30%). ). Well above Argentina’s 29.41%. And again, no one doubts that inflation in developed Europe is a problem under control.


Among the countries with the highest rates abundant money supply relative to GDP of 2020, Japan (282.89%), China (213.78%), United Kingdom (157.51%), India (133.36%), Chile (133%), Australia (123.84%) , Brazil (108.06%), United States (91.37%) and Bolivia (86.45%)

Argentina closed 2021 with a broad money supply equivalent to 22.3% of GDP, while in 2020 it was 22.8%. However, year-on-year inflation increased by 14.8 percentage points. It is true that the issue played an important role, but in 2018 and 2019, on the orders of the International Monetary Fund, the Macri government did not use the monetary question to finance itself, however, inflation was 47.6% and 53.8%, respectively.

Exchange rate

Imports and foreign currency indebtedness exerted pressure on the exchange rate. Competition for foreign currencies occurs both commercially and financially, and the pressure that increases the price is transferred to domestic prices. When dollars are scarce to import inputs, producing becomes more expensive and therefore ultimately affects purchasing power. The high indebtedness in foreign currencies is the cause of a higher price level.

In the medium to long term, import substitution increases export capacity and removes pressure on currencies, while debt which has gone to speculation and not expansion of productive capacity, keeps it constant. To claim that the dispute is resolved by non-intervention or by the removal of controls is to forget the repercussion on prices of the jumps in devaluation of 2015-2019 and more precisely of the post-PASO 2019 liberalisation.

Interest rate

The current level has a direct impact on the price level. This high rate level reproduces the nominality of the inflationary process and largely explains the hysteresis of the phenomenon in the Argentine economy.

“To induce new investment, the rate of return on cost must be greater than the interest rate”Fisher points out in interest theory. Keynes agrees in his general theory that “the stimulating effect of the anticipation of higher prices is not due to them increasing the interest rate (which would be a paradoxical way of stimulating production – in which the interest rate increases , the incentive is neutralized to the same extent – ), but rather increases the marginal efficiency of a given volume Capital city”.

In other words, if the annual interest rate paid by an entrepreneur to make an investment is 50%, the selling price of your new offer will necessarily be higher than this level, to repay these funds and obtain a positive profit. Opposite case, for the existing savings to become a productive investment, the entrepreneur’s incentive is linked to prices that exceed the return on the investment of his capital in the long term.

Countries with the highest interest rate in 2021 were: Zimbabwe (60%), Venezuela (52.7%), Argentina (38%), Angola (20%), Turkey (14%), Ghana (13.5% ), Nigeria (11.5%), Georgia (10.5%). ) and Lebanon (10%). Hence, the countries with the highest inflation in the world.

At the other extreme are Switzerland, Austria, Belgium, Estonia, Finland, Germany, Greece, Ireland, with monetary policy rates at zero percent or even in negative territory . And with very low levels of inflation.

inflationary process

Both the period since the launch of convertibility from 1991 to 2000 like that which goes from 2003 to 2012 they are characterized by low inflation and an average reference rate below double digits: 9.09% and 7.09%, respectively. Although they are opposite periods from an economic point of view, the two decades coincide in the sense that the inflationary process was not a problem.

After the stability observed in 2017boom of the financial valuation model, with a currency lag strategy for the inflow of foreign capital through private debt and high return peso instruments, the model became unsustainable around April 2018 when the financial market abruptly cut funding.

The capitals began their departure with the same rapidity with which they had entered (Jorge Schvarzer would say) and, after the agreement with the IMF, the executive branch decided to free the interest rate to the game of supply and demand, in an unsuccessful attempt to contain the outflow of capital to the ‘foreigner.

Inflation began to accelerate along with the exchange rate and the monetary policy interest rate, which peaked at 86 percent September 10, 2019.

Orthodox textbooks indicate that such a measure would have been more than enough to contain prices. That’s not what was found.

Offer and demand

The assumption that a rise in interest rate results in lower inflation is based on the assumption that demand is responsible for price rises. This could hardly be the reason with sub-optimal consumption levels. This should be a useful strategy when the economy is fully utilizing its resources, but when it is suboptimal, credit becomes even more expensive, production becomes more expensive, supply falls, and inflation soars.

Lowering interest rates and ceasing to be the backyard of international finance that achieves extraordinary returns should be a priority. Despite advances in recent years, dismantling the financial capital appreciation model is more complicated than it seems, but the need is pressing.

new legislation that regulate financial institutions and which allows funds to be directed towards a productive and socially inclusive economic system remains a suspense account.

An economy with unsatisfied aggregate demand can no longer sustain a process with positive real interest rates. The interest rate is the price of money and in Argentina money is extremely expensive.

Inflation has multiple causes, it is true. But one of these central causes is the level of the interest rate, which is rare in the daily approach. Price controls can be useful and temporarily necessary, but they do not solve inflation. The problem is mainly macroeconomic.

* Economist. Argentine economic and social history teaching assistant (UBA).

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