Financing COVID-19, inflation and fiscal constraint

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Abstract

The COVID-19 pandemic is producing an economic depression that could be substantially reduced if the state in each country, besides making the required health spending, compensates the companies and households that are losing with the social distance and lockdown policies. Governments limit their expenditures to not increase the public debt. There is, however, the possibility of the central banks buying new securities from the respective treasury to finance such exceptional expending. Considering the several economic constraints that policymakers face, this policy will not conflict with the inflation constraint. Money is an endogenous variable that does not cause, but just validates a going inflation. It conflicts partially with the fiscal constraint but avoids the increase of the public debt. And in this case there are no bad consequences of fiscal indiscipline – excess demand that, successively, causes increase in imports and current account deficits that, successively, appreciate the national currency, accelerate inflation, and lead to currency crises. Monetary financing of the COVID-19 will not cause any of these three evils.

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APA

BRESSER-PEREIRA, L. C. (2020). Financing COVID-19, inflation and fiscal constraint. Revista de Economia Politica, 40(4), 604–621. https://doi.org/10.1590/0101-31572020-3193

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