Monetary policy in Argentina: the effect of covid-19 under a fiscal dominance scheme

Abstract

Since the beginning of the covid-19 pandemic’s isolation, the Central Bank of the Argentinian Republic has increased assistance to the National Treasury in order to finance the growing fiscal deficit. However, fiscal dominance is not exclusive to this context, and is defined as the situation in which the central bank loses autonomy to conduct monetary policy in order to keep the price level stable and becomes the source of financing for fiscal imbalances, i. e., it only collects inflationary tax. Under this scheme, the money market imbalance is what explains inflation. According to empirical evidence for Argentina between 2006 and 2020, there is a positive and statistically significant relationship between monetary issue and inflation: for every 1% increase in the monetary base, the Consumer Price Index increased by 1.02%.