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Sources of inflation and the effects of balanced budgets and inflation targeting in developing economies

Guilherme Martins () and Peter Skott ()

UMASS Amherst Economics Working Papers from University of Massachusetts Amherst, Department of Economics

Abstract: This paper presents a model of inflation in developing economies and uses it to evaluate macroeconomic policy in those countries. We see cross-sectoral interactions between demand and supply side forces as central and show that the standard macroeconomic policy recommendations of inflation targeting and balanced budgets (i) increase volatility by amplifying external shocks and (ii) can lead to premature deindustrialization. The analysis applies to economies with marked underemployment, a central feature of developing and emerging countries. The recent Brazilian experience is used to illustrate the argument.

Keywords: inflation targeting; Dutch disease; overvaluation; commodities boom; Washington consensus (search for similar items in EconPapers)
JEL-codes: E63 O14 O23 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pke
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Journal Article: Sources of inflation and the effects of balanced budgets and inflation targeting in developing economies (2021) Downloads
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