Fiscal Consolidation and Disinflationary Frictions in Argentina

Abstract

Argentina has struggled with persistently high inflation for the past two decades, surpassing 200% in 2023. While there is a broad consensus on the need for fiscal consolidation to curb inflation in the country, the path to disinflation is fraught with challenges. The objective of this paper is to provide an analysis of the frictions that arise in the process of reducing inflation through fiscal consolidation in Argentina. To accomplish this, we embed Argentina’s unique institutional features—particularly those related to fiscal spending and inflation dynamics—into an otherwise standard macroeconomic framework, drawing on the logic of Sargent and Wallace (1981), which links fiscal deficits to inflation. We then use the model to analyze the potential short- and long-term inflationary consequences of different strategies for closing fiscal imbalances.