Abstract

The paper analyses the relationships among inflation, inflationary tax, and
public deficit for the Brazilian economy during the eighties. Initially, these relationships are
described somehow simplistically using the so-called inflation tax model. The working hypothesis
are (1) there is an absolute limit to the government’s deficit financing by inflationary
tax; (2) a given amount of inflationary tax can be collected at an either high or low rate of
inflation and (3) the inflationary tax collected by the government depends on the monetary
conditions of the economy. Using this analytical framework, a simulation exercise is carried
out to estimate the inflation-tax finance of the public deficit for the Brazilian economy during
the period 1982-88. The main conclusions are: (1) the conditions of the inflationary tax
finance changes after 1986, when the focus of the economic policy shifts from the conventional orthodoxy to what is called the heterodox approach; (2) the accelerating inflation has
radically weakened the ability of the government to collect inflationary tax and (3) under
these conditions price freezes and exchange rate fixing may be considered necessary to ensure
a transition from a high to a low level of inflation.

JEL Classification: E31.