BUDGET DEFICITS AND INFLATION IN SOME LATIN AMERICAN AND ASEAN COUNTRIES

Abstract

This academic exercise presents the major views on the relationship between budget deficit and inflation. The views are the Classical Orthodox, Structuralist, Two-way Causality, and the Integrated. The relevance and applicability of the views are then examined in the literature on four Latin America Countries - Argentina, Brazil, Chile, and Mexico, and three ASEAN Countries - Indonesia, the Philippines, and Thailand. There still exist a lot of controversies regarding which is the correct view of the link between inflation and budget deficit in the literature. However, most of the recent publications have abandoned the assumption of the exogeneity of money supply and it follows naturally that the Classical Orthodox explanation of the relationship is dismissed as well. A short data analysis based on correlations is carried out for the ASEAN countries but the results are inconclusive. The Integrated explanation of the budget deficit-inflation relationship is preferred (though not fully accepted) to the rest on the grounds of its robustness and eclectic approach. Thus, there has yet to be a new paradigm capable to explain adequately the inflationary experiences of the countries.