Chronic Inflation in an Industrializing Economy

Since the military coup d’etat in 1964 Brazil has experienced a period of almost uninterrupted inflation measured in tens and sometimes hundreds of per cent per year. In this book Vincent Parkin sets out to explain the nature and causes of chronic inflation in middle-income developing countries by focusing on the Brazilian experience. The book is divided into three parts. In Part I a small qualitative model is developed that shows how structural bottlenecks and cost-push measures can lead to continuous inflation. This model is then augmented by making provision for stocks and flows of financial assets and income/expenditure balances of the private and public sectors. The augmented model forms a bridge between structuralist explanations for inflation, that have tended to abstract from money and finance, and purely monetary explanations. Part II focuses on wage and price setting behaviour in key individual markets. Testable models are derived and estimated using time series data, the empirical results of which end support to the structuralist approach.
In Part III a simulation model of the Brazilian economy (comprising 52 equations) is developed which is used to ‘re-run history’ assuming a variety of inflationary stimuli and a number of economic policy responses. The author attributes the root causes of inflation to structural imbalances in the economy as well as to the behaviour of certain key prices. The widespread indexation of wages and prices coupled with differences in the way prices and output are determined in industry and agriculture means that a one-off ‘shock’ is likely to set in motion a continuous inflationary spiral which will tend to remain at a given rate until the economy receives a further shock. He rejects the monetarist explanation for inflation and argues instead that the relationship between money and inflation is seldom clear-cut. The book will be of interest to all economists concerned with inflation and Latin America.