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Public Choice

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03.01.2020

The political economy of hyperinflation in Venezuela

verfasst von: Giovanni B. Pittaluga, Elena Seghezza, Pierluigi Morelli

Erschienen in: Public Choice | Ausgabe 3-4/2021

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Abstract

We study the Venezuelan hyperinflation as a political phenomenon with distributional and efficiency effects. The hyperinflation originated in publicly financed benefits for the government’s low-income supporters and also had a distributional effect in wiping out the value of bonds and other financial assets of the middle and upper classes that opposed the government. We confirm the fiscal origin of the hyperinflation and also show that, with the inflation tax as the government’s principal source of supplementary revenue, policy managers did not avoid moving to the inefficient side of the Laffer curve. The rate of inflation exceeded Cagan’s revenue-maximizing inflation tax rate and therefore also Bailey’s efficient inflation tax rate.

Vorheriger Artikel The limits of central bank independence for inflation performance

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In populist regimes, this type of expense is paramount. See Pittaluga and Seghezza (2018).

The acceleration in the inflation rate that occurred between 2013 and 2017 was accompanied by continual depreciation of the Venezuelan currency, the bolivar, on the black market. Such an exchange rate trend highlights an empirical regularity that Paldam (1994) called “Bernholz’s Law”. Initially, the black market value of the bolivar depreciated in real terms and then began to appreciate in early 2016 when the inflation rate became explosive. See Bernholz (1982, 1988).

The gradual but marked depreciation of the nominal official rate of exchange was accompanied by a substantial increase in the equivalent bolivar value of foreign debt. As shown in Table 1, the ratio of foreign debt to exports between 2013 and 2016 (latest data available) increased from 142.0 to 385.9%. Much of Venezuela’s foreign debt belongs to state-owned PDVSA. Default on that debt is problematic because PDVSA has to obtain the necessary funding for oil production on the foreign financial market.

As in Montiel (1989) and in Fischer et al. (2002). Dornbusch et al. (1990), instead, used the real monetary base as a proxy for real fiscal deficits.

The null hypothesis is rejected at a level of probability below 0.05.

The function shows how much of the prediction error of each variable can be explained by innovations in the variable under consideration.

The marginal cost of raising revenue through seigniorage is given by \(\frac{\partial W/\partial \pi }{\partial S/\partial \pi }\), where \(W\) is the welfare loss from inflation and is the area under the money demand curve. The ratio \(\frac{\partial W/\partial \pi }{\partial S/\partial \pi }\) is the marginal cost of inflationary finance, which simplifies to \(\partial W/\partial S\), that is, to the marginal welfare cost associated with a unit increase in seigniorage. Following Bailey (1956), \(W = \int_{0}^{\pi } {\left( {e^{ - \alpha x} - e^{ - \alpha \pi } } \right)} dx\), which leads to \(W = - e^{ - \alpha \pi } \left( {\frac{1}{\alpha } + \pi } \right) + \frac{1}{\alpha }\). The first derivative of W with respect to inflation is \(\frac{\partial W}{\partial \pi } = e^{ - a\pi } \alpha \left( {\frac{1}{\alpha } + \pi } \right) - e^{ - \alpha \pi }\). Therefore, the marginal cost of inflationary finance is \(\frac{\partial W/\partial \pi }{\partial S/\partial \pi } = \frac{\alpha \pi }{1 - \alpha \pi }.\) Then, equating the marginal cost of inflationary finance to the marginal cost of raising money through the inflation tax, i.e., \(\frac{\alpha \pi }{1 - \alpha \pi } = \mu ,\) we obtain welfare-maximizing inflation tax \(p^{ * *} = \frac{\mu }{{\alpha \left( {1 + \mu } \right)}}\).

That is, \(p_{t + 1} = p_{t + 1}^{e} + \varepsilon_{t + 1}\) where ε is a stationary process.

In the case of Venezuela, M2 coincides substantially with M3.

Although we are aware that for various goods prices were capped and therefore that the indicator underestimates Venezuela’s inflation, it is such variation that constitutes the opportunity cost of holding money.

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Titel: The political economy of hyperinflation in Venezuela
verfasst von: Giovanni B. Pittaluga
Elena Seghezza
Pierluigi Morelli
Publikationsdatum: 03.01.2020
Verlag: Springer US
Erschienen in: Public Choice / Ausgabe 3-4/2021
Print ISSN: 0048-5829
Elektronische ISSN: 1573-7101
DOI: https://doi.org/10.1007/s11127-019-00766-5

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