Front Matter Page Monetary and Exchange Affairs Department Contents Summary I. Introduction II. A Simple Monetary Model III. A Regime with a Constant Inflation Rate IV. Temporary Increases in the Inflation Rate V. The Inflation Tax Bias in Mexico and Uruguay VI. Conclusion VII. References Text Table Table 1 Figures Figure 1 Figure 2 Figure 3 Summary The distortions caused by inflation on conventional national account aggregates have been widely discussed in the literature. Two aspects of the problem have
Mexico and Uruguay, the paper shows that the inflation tax bias may represent a significant percentage of domestic saving.
bonds from the government at t=0. In other words, at a time when the government actually registers an increasing surplus and private saving remains equal to zero, d NA shows a deficit and s NA goes up temporarily. As before, heavier reliance on the inflation tax creates the illusion of a larger deficit accompanied by an increase in private saving. V. The inflation tax bias in Mexico and Uruguay This section illustrates the empirical relevance of the inflation tax bias discussed in the preceding sections. Table 1 compares the figures of the inflation tax
their effects on saving see IMF (1993) , Appendix 1, and Arrau and Oks (1992) . 19 The agreement with commercial banks, finalized in March 1990, restructured US$48 billion of commercial bank debt through a menu of options that incorporated principal and interest reduction instruments; see El-Erian (1992) . 20 Estimates of the fall in the inflation-tax bias of Mexico’s saving rates during this period range from 2 to 5 percentage points of GDP—that is, from 20 to 50 percent of the drop in private saving rates; see IMF (1993) and Hamann (1993