Food supply and inflation

Abstract

The paper presents an analytic version of the Latin American structuralist theory of inflation. It emphasizes the difference between the productive sectors of the economy and draws attention to the fact that the inflationary process is closely linked to inconsistent claims for shares in income. It describes a Keynesian economy with two (three) sectors. Real desired wages are rigid. Money is passive. It is shown that the structuralist hypotheses are capable of generating disequilibria that can lead to constantly rising prices without any built in mechanism to offset them. Steady inflation can only persist if workers allow their real wage to be kept below target. As the workers try to catch on, the model will blow up: an accelerating inflation can be observed in many Latin American countries during periods when wage settlements, aimed at restoring inflation losses, escaped the government control. The paper also explores the implications of foreign trade: it shows that, under structuralist hypotheses, external disequilibria cannot be corrected through exchange rate devaluations alone, and it examines the stagflationary impacts of an increase in the price of imported intermediates.