Government Deficits and Inflation

An understanding of the causes and consequences of the high rate of price inflation experienced in Canada will have a sizeable payoff for future economic policymaking. Some aspects of that analysis are now reaching a wide audience for critical commentary. Tom Courchene' s recent book (1976), discussing monetary policy and inflation in the context of the floating exchange rate, provides one rich source of information and analysis. Another link in this chain is the connection between government deficits and inflation. Robert Crozier's recent analysis (1976a, 1976b) attempted to disprove the existence of such a link, even though he found that the government sector contributed to inflation in a variety of other ways. These included tax push inflation, the erosion of incentives, the substitution of non-wealth creating activities for wealth creating activities and so forth. On statistical grounds alone the evidence presented by Crozier will be an enlightenment to many who have been critical of Federal government behaviour in recent years. Essentially, Crozier argued that if the national accounts definition of the deficit is used and Canada Pension Plan and Quebec Pension Plan contributions added, all levels of government combined have been running a persistent surplus. How then, he asks, can deficit financing account for inflation? This analysis has been critized by Robin Richardson and Charles Loewen (1976a, 1976b) as well as by myself (1976a, 1976b). In my view the Crozier study does not allow us to reject the hypothesis in question. It misses a number of points that must be clarified before one can comfortably come to the conclusion that government deficits are unrelated to inflation. This debate concerns some of the more fundamental issues of economics and, in particular, those that have been researched most extensively in recent years in response to the failures of the basic Keynesian model. The latter approach has looked at the effects of fiscal policy in terms of flow equilibrium. What happened in asset markets as a consequence of financing the fiscal

Economics · Government (linguistics · Inflation (cosmology · Keynesian economics · Macroeconomics · Monetary economics · Canadian Policy and Governance · Fiscal Policies and Political Economy · Monetary Policy and Economic Impact · Philosophy

• Deficit Financing and Inflation

  Robin M Richardson•Canadian Public Policy•1977

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• Prolegomena to the choice of an international monetary system

  Open Access•Richard N Cooper•International Organization•1975

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