L9 Inflation - LatinAmerica LatinAmerica...

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    Inflation and Stabilization in  Latin America
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    Inflation’s special connection to  Latin America
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    Macro Policy Overview --  Disagreements Keynesian- Structuralist Prices are sticky Short run Supply is horizontal -- G spending provides stimulus Trade off between unemployment & inflation Monetarist-Classical Markets clear Long run Supply is vertical G spending causes inflation Long run natural rate of unemployment
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    Macro Policy Overview --  Disagreements Keynesian- Structuralist Low interest rates to encourage investment Savings depends mainly on consumption – a function of income Govt deficit spending for growth Monetarist-Classical Tight monetary policy to control inflation Savings for growth depend on interest rates Balanced budgets to keep inflation low
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    A long  history of  inflation A way of  life Wages  and prices  were  indexed
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    Structural vs Monetarist Inflation Debate Structuralist View Inflation is inevitable with rapid growth MV=PQ If prices are rising and the money supply and velocity are constant, output will fall Monetarist View Inflation is bad for growth in the long run MV=PQ If prices are rising, it means money is growing faster than the real economy
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    Structural vs Monetarist Inflation Debate Structuralist View Real causes Bottlenecks Supply shocks Falling terms of trade means falling currency and inflation Some benefits low real interest rates encourage investment, reward entrepreneurs seigniorage Monetarist View Money causes Friedman – Inflation is always and everywhere a monetary phenomena Problems Low or negative interest rates discourage savings Distorts investment Creates upward spiral Leads to BOP problems
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    Monetarist prescription –  the Bitter Medicine Balance the budget Increase taxes Decrease govt spending Increase interest rate Recession may result in the short run, but growth in the long run
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