ABSTRACT
This chapter outlines some of the factors that contributed to large fiscal deficits and large changes in the money supply that came to be typical for the region in the second half of the twentieth century. Macroeconomic imbalances developed in the region from the 1950s to 1970s that culminated in serious economic difficulties in the 1980s. The key to understanding macroeconomic policy in Latin America starts with a discussion of fiscal policy. A government budget deficit is a reasonable response to a recession. Economic growth that is too fast may call for a fiscal policy that intentionally produces a surplus in the government’s budget. The fiscal deficits of the 1980s shown above set the stage for enormously rapid growth in the money supply. The equation of exchange is an exceptionally useful framework for thinking about how changes in the money supply affect the price level.
