In the context of monetary and fiscal policy, “dominance” can be interpreted in two key ways. Understanding these concepts can shed light on the complexities of economic situations, particularly in Argentina under President Javier Milei’s leadership.
Two Interpretations of Dominance
The first interpretation comes from Milton Friedman, in 1968, who posited that when monetary and fiscal policies are at odds—one being expansionary and the other contractionary—the impact of monetary policy typically prevails.
The second interpretation was articulated by Thomas Sargent and Neill Wallace in their 1981 work titled “Unpleasant Monetarist Arithmetic.” They suggested that despite claims of independence, monetary authorities often come under political pressure to support fiscal policy through mechanisms such as debt monetization.
Examining Argentina’s Economic Situation
To better understand the Argentine economy after two years under Milei’s administration, we can explore these definitions of dominance. My aim is to present a practical approach that acknowledges the realities on the ground while still adhering to theoretical principles.
It is undeniable that under Milei’s governance, Argentina achieved a primary surplus in its national budget in 2025. While the sustainability and magnitude of this surplus can be debated, one could argue about the accounting treatment of accrued but unpaid interest from short-term treasury notes (LECAPs). Even with a primary surplus of approximately 1.4% of GDP, it could be construed that the overall budget is in deficit to the tune of 1.3% of GDP, as opposed to a minimal surplus of 0.2%.
Nonetheless, during the past six months, inflation has hovered around 30% annually.
Assessing Monetary Policy Effectiveness
If we accept Friedman’s concept of dominance, it becomes evident that monetary policy has been expansionary, notwithstanding the administration’s assertions that there is no further inflationary financing of government operations.
Conversely, Sargent and Wallace’s unpleasant monetarist arithmetic might provide insight into the persistent high inflation. In this light, it appears that the Argentine Central Bank has been compelled to assist the government in floating its debt by monetizing a portion of it.
In short, the monetary base expanded by 43% and M2 by 27% over the past year. Notably, over 60% of the Central Bank’s assets comprise loans and bonds issued to the government, essentially illustrating debt monetization. Furthermore, more than 46% of its liabilities are non-monetary, signifying that in addition to the money the government is issuing, the Central Bank is also borrowing.
This indicates that the government is actively increasing the money supply in the economy, with a focus on acquiring foreign reserves.
The argument rooted in Friedman’s concept suggests that an increase in money supply is intended to align with the rise in money demand. However, the ongoing inflation, well above 30% annually, negates this assumption. It is increasingly clear that there is no adequate demand within the economy, and therefore, traditional monetarist theories and rational expectations cannot adequately explain the current situation in Argentina.
A Broader Explanation
Alternatively, under the frameworks we’ve discussed, it is possible that the government is fully aware that its fiscal policy is insufficient to stabilize monetary expectations. Following a staggering annual inflation rate exceeding 200%, many Argentinian citizens may perceive the current inflation level of 30% as a relief. In the meantime, the government may be seeking time to pass significant structural and microeconomic reforms intended to enhance the business environment and invigorate economic growth.
This leads me to propose a third theoretical framework for analyzing the situation in Argentina, identifying Milei’s approach as practical rather than purely pragmatic.
This framework, formally known as “The Fiscal Theory of the Price Level,” has been championed primarily by John Cochrane, particularly in his recent booklet titled “Inflation.”
Personally, I am more inclined toward a less formal depiction of this argument, which I discovered in Jacques Rueff’s theory of rights laid out in his 1945 work, “The Social Order.”
To simplify, Rueff contends that a government can issue claims on real wealth that exceed its tax capacity. In a predictable scenario, economic agents would adjust their expectations relative to the real value of these claims, often accepting them at a discount. However, the government holds another tool: it can compel the Central Bank to accept these claims at face value, rather than at market valuation. As a result, some claims circulate at face value while others are traded at a discount, depending on the access economic players have to the Central Bank’s discount window.
Government Claims and Economic Consequences
As the government’s obligations near maturity, the expectations of economic agents about receiving payment—whether in terms of anticipated purchasing power or merely nominal terms—start to take shape.
Mr. Milei began his administration by vowing not to default on national debt, a promise he is technically upholding. However, due to the substantial debt inherited from prior governments and the constraints on national budget reductions, some degree of debt monetization remains essential, even in light of achieving a primary surplus. Many economic players in Argentina perceive this reality, leading to a diminished demand for pesos and peso-denominated debt, which in turn contributes to the ongoing inflation.
However, if recent economic data holds true, the economy may be on a growth trajectory, suggesting that confidence in reforms is building, and there is hope that Argentina could potentially overcome its debt challenges.
Conclusion
This presents the most coherent interpretation I can offer. As someone who genuinely hopes for Argentina’s success, I sincerely wish for this outlook to materialize.
[1] For readers interested in data, I recommend checking the insightful “currency monitor” section in the Reform Watch by Universidad Francisco Marroquín in Guatemala.
