There are at least two definitions of “governance” in relation to fiscal and monetary policy.
The first, proposed by Milton Friedman in 1968, is that when monetary policy and monetary policy conflict, that is, one expands and the other cuts, the effects of monetary policy tend to be stronger.
Another explanation, well developed by Thomas Sargent and Neill Wallace in their 1981 “Unpleasant Monetarist Arithmetic”, is that, as monetary authorities protest their independence, when push comes to shove, political pressure forces them to support monetary policy through debt monetization.
Let’s see if, using the concept of governance and its two meanings, we can make sense of the Argentine economy after two years under the administration of President Javier Milei, or if we need to add another theoretical tool.
What I want to suggest in this short article is that there may be a way to make sense of what is happening in Argentina that is not purist or pragmatic, but practical. That is, one who recognizes the truth but does not abandon the principles. To help us with that, let’s talk about policy governance.
That Milei’s administration has created a large surplus in the national budget by 2025, I think, cannot be disputed. We can argue about how sustainable it is and how little, we can also think that maybe the management of the funds accumulated but not yet paid interest on short-term notes issued by the Argentine treasury (LECAPs) should be different, so, even if there is a primary surplus of about 1.4% of GDP, the overall budget does not have an interest of 1.3% of GDP but a surplus of 0.3% of GDP. of GDP.
Still, inflation has been close to 30% per year for half a year now.
If you accept Milton Friedman’s concept of authoritarianism, you must conclude that monetary policy has been expansionary despite his administration’s reasonable complaints that there is no more inflationary financing for the federal government.
On the other hand, perhaps, what explains the current high rate of inflation, compared to the annual rate of 2025 of 7.2% of the region, the arithmetic of the money that is not favorable to Sargent and Wallace, and the Central Bank of Argentina has been forced, after all, to help the Argentine government to run its debt by making money with a portion of the money.
To make a long story short,[1] the monetary base grew by 43% and M2 by 27% last year. Over 60% of the central bank’s assets are loans and bonds to the central government (not to put a fine point on it – that’s debt monetization plain and simple). Additionally, more than 46% of central bank debt is non-financial; that is, on top of everything the central government prints, the central bank also borrows.
The bottom line is that the Argentine government is increasing the money supply in the economy (both monetary base and debt instruments) and is using those resources primarily to buy foreign reserves.
The argument regarding Friedman’s concept of governance that applies in this situation is that the increase in money is intended to go along with the increase in the demand for money in the economy. Continued inflation of more than 30% per year has already given the lie to this claim. It should be clear by now that there is no such need in the economy, and, therefore, no clear financial explanations or reasonable expectations that can account for what the government is doing in Argentina.
Another explanation, still under the two frameworks we have considered so far, is that the government knows very well that their monetary policy is not enough to support monetary expectations, and that after annual inflation of more than 200 percent, people can see 30% as a relief. Meanwhile, the government is finding time to pass in the conference some structural and economic reforms that could effectively reduce the cost of doing business in Argentina and make the economy grow again.
That is why I propose a third theoretical framework to understand what is happening in Argentina, which can label the administration of Milei as active, not reactive.
That framework, in its official name, is called the “Fiscal Theory of the Price Level” and has been promoted primarily by John Cochrane, most recently in a pamphlet entitled “Inflation.”
I must admit that I prefer a less structured presentation of the argument, and I found that in Jacques Rueff’s view of rights as first proposed in his book “The Social Order” of 1945.
At the risk of oversimplification, Rueff’s theory is that in the budget process, the government may issue claims on real wealth that its taxing power is insufficient to cover. If that were the whole story, economic agents would measure their expectations of the real purchasing power of government claims and accept them only at a discount. The government, however, has another trick of its own: it can force the central bank to accept those claims at a discount—at face value rather than market price. Therefore, some of the government’s claims will be sold at face value, and others at a discount, depending on whether certain economic agents have access to the central bank’s discount window.
By the way, Alex Chafuen and I have used Rueff’s ideas to make sense of Milei’s policies, which you can read here. The present essay is an additional application of that framework to new data.
As government claims approach maturity, what often happens is that the economic agent’s expectations of payment in terms of expected purchasing power, or just terms, are met.
Mr. Milei opened his government with a promise that he would not pay the national debt. Officially, he honors that promise. However, the amount of debt inherited from previous administrations and the limits on how much the national budget can be cut mean that, in practical terms, some form of debt financing is still needed, even if initial surpluses have been achieved. A significant number of economic agents in Argentina can see that and reduce the amount of government obligations. That takes the form of low demand for pesos and pesos debt, and explains the current persistence of inflation.
Although that happens, if the latest numbers of economic activity are correct, the economy is growing, which is an indication that confidence in the reforms is increasing, and there is a possibility that Argentina may grow in its debt.
That’s the best explanation I can give. As someone who wishes the best for Argentina, I hope it’s true.
[1] For data-hungry readers, please check out the excellent “money monitoring” tab at Reform Watchproduced by Universidad Francisco Marroquín in Guatemala.
