Abstract
The paper develops a model of seigniorage in an open economy, linking inflation, the government budget and the external balance. It introduces financial markets and interest rates in the traditional Cagan style model of inflationary dynamics and it evaluates the experiences of Brazil and Mexico. The model relates inflation in the 1980s to interest payments on the external public debt. The paper also argues that inflationary finance has been combined with very fast growth of domestic debt, setting the stage in Brazil for unsustainable domestic debt growth in the Sargent-Wallace style. The Collor Plan stopped this process, temporarily.
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