International Monetary Fund World Economic Outlook database

A battle between regional governments can give rise to hyperinflation. [2] To simplify the issue, suppose that each region in Argentina has its own printing press. Each region can then independently undertake monetary policy by printing Argentine pesos and using those pesos to fund projects within their regions. The inflation tax is very tempting in these circumstances: a regional government can in effect tax people in other regions to help pay for its own projects. Why? Because printing money results in an inflation tax on everyone who has pesos. If money is printed in one region, some of the inflation tax will be paid by people in other regions who have pesos. To be concrete, imagine you are a politician in Buenos Aires who wants to raise 100 million pesos for a project in that city. You could levy an income tax on citizens of your area. Alternatively, you could print 100 million pesos. If you impose the income tax, your own citizens must pay it all. If you impose the inflation tax, people living in other regions of Argentina pay some of the tax. Your constituents get the benefit, but others bear a large part of the costs. Acting in the interests of your constituents, you print the pesos. Of course, this story is true not only for you but also for the leaders in all regions. In the end, there is excessive money growth in the economy as a whole and high inflation. The monetary authorities are weak because no single authority controls the overall money supply. The situation we have described is sometimes called a prisoners’ dilemma. In a prisoners’ dilemma, the actions of one person imposes costs on others, and the behavior that is best for each individual decision maker (in this case, all the regional monetary authorities) is not best for the country as a whole. Toolkit: Section 16.9 “Nash Equilibrium” If you are interested in more detail on the prisoners’ dilemma game, you can review it in the toolkit.