Financing Covid-19, inflation and the fiscal constraint

Luiz Carlos Bresser-Pereira

Submitted for Forum for Social Economics June 14, 2020.


The Covid-19 pandemic is producing an economic depression that, however, 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 lockdowns policies. Governments, however, limit their expenditures to not increase the public debt. There is, however, the possibility of the central banks buying new securities from the treasures to finance such exceptional spending. 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 validate a going inflation. It conflicts partially with the fiscal constraint but avoids the increase of the public debt. And, in this case, it does not conflict with the bad consequences of fiscal indiscipline - excess demand that, successively, causes increase in imports and current account deficits that 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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