Sunday, March 27, 2011

Krugman vs. Galbraith on the deficit

A good debate on the limits of the deficit between Paul Krugman and Jamie Galbraith. Krugman argues that, although not important now, deficits may translate into inflation. Further, he seems to suggest that insolvency is possible even when debt is denominated in the country's own currency. In this view, hyperinflation (the infinite inflation of Jamie's scenario) would follow.

The problem is that hyperinflations (the German in 1920s, the Latin American cases in the 1980s) were not a case of too much money printing resulting from fiscal deficits when the economy was near full employment. The simple explanation is that reparations (Germany) and foreign debt (LA) forced depreciation in order to service foreign (not domestic) debt. This in, in turn, increased the price of imported goods, which led to a reduction of real wages. Wage resistance led to foreign exchange-wage spirals. I formalized a model here (for those interested).

No comments:

Post a Comment

IMF Programs: Past and Present

A roundtable with Daniela Gabor, Roberto Lampa and Pablo Bortz, on the IMF and its Programs this Thursday in Buenos Aires, organized by ...