Causes of inflation: between the “distributive bid” postulated by the BCRA and the monetary explanation

Argentina has suffered more than a decade ago inflation two-digit annual, which represents one of the most critical problems that the economy has given the impossibility of reducing it to international levels despite the different strategies to combat it, including the one currently adopted.

In that sense, the Central Bank (BCRA) public on his blog an analysis of the determining causes of this monetary phenomenon, but which received much criticism from economists given the preponderance given to the so-called “distributive bid” and the relativization of fiscal and monetary influence.

The article by the monetary authority, based on an econometric study on the trajectory of the exchange rate and wages, postulates that inflation is a multi-causal phenomenon and highlights the incidence of the “distributive bid” within its determinants.

“Faced with an increase in the exchange rate, and its consequent effects on the price level, workers can try to rebuild their real wages by demanding nominal improvements, which may have a subsequent effect on prices, starting a new round of claims of wages that feed back the inflationary process “, The BCRA pointed out, which was one of the aspects most questioned by economists.

For Fausto Spotorno, Chief Economist at OJF, The Central’s view makes inflation dependent on inflation itself and only analyzes how prices are made up, since both wages and the exchange rate are prices.

“The post makes inflation depend on inflation, because it says that prices depend on wages and the dollar, and that is like saying that prices depend on other prices. Because the exchange rate and wages are prices. They do not look at what inflation depends on, but how prices are composed“he explained to The chronicler.

And he added: “It would be the equivalent of saying that the speed of the car depends on the speed at which the motor shaft rotates, it would serve to see which item has the most initial impact but not as a determinant of inflation.”

Although the BCRA mentions among the causes the monetary imbalances that lead to the rise in the exchange rate, Spotorno remarks that the article confuses the money supply with the demand given that “when the quantity of money is divided by inflation the result is the demand for money.

“Because in the long run, people decide how much money they want to have in their pockets, what purchasing power they want to have. If there is too much money, prices are going to increase until it is absorbed, so the report is not very good,” he said.

Fernando Marull, FMyA economist, coincides with the position of Spotorno and marked its differences with respect to the position of the BCRA, by emphasizing the fiscal and monetary roots of inflation.

“Argentina has inflationary problems unlike the world because it repeatedly goes into fiscal and monetary crises and ends in currency crises, which lead to devaluations. But the root is fiscal and monetary, which destroy the currency. Argentina ran out of currency“, he commented in dialogue with this medium.

In any case, Marull introduced a nuance when considering that the Central Bank’s explanation could correspond to the analysis of inflation in the short term, although not for the long term or to observe trends.

While, Matías Rajnerman, economist at Ecolatina, he assured that in Argentina “everything generates inflation”, from the monetary issue to the movements of the exchange rate, and showed certain coincidences with the article of the BCRA.

In Argentina everything generates inflation, in some way there are monetarist issues, orthodox issues, heterodox issues. The issue generates inflation, the exchange rate generates inflation, and sometimes the exchange rate moves due to excess supply of pesos and others for other reasons, as happened in the post-STEP, when the monetization of the fiscal deficit was at a minimum, “said Rajnerman, referring to the 25% jump in the dollar in August 2019 that made the inflation rate rebound in the following months.

And he concluded: “The note says that many times an excess supply of pesos is usually translated into an excess demand for dollars and the exchange rate usually accelerates inflation, it does not seem so dogmatic to me. The econometric study to which it refers, for at least the one that reaches 2015 is very good, so I am not very critical of the article. “

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