Advantage has at least two meanings when it comes to monetary and fiscal policy.
The first, proposed by Milton Friedman in 1968, is that when monetary and fiscal policy are contradictory, that is, when one is expansionary and the other contractionary, the effectiveness of monetary policy tends to prevail.
Another implication, well formulated by Thomas Sargent and Neil Wallace in 1981’s “Uncomfortable Monetarist Arithmetic”, is that while the monetary authorities protest their independence, in times of need political pressure forces them to support fiscal policy by monetizing debt.
Let’s see whether we can use the concept of dominance and its two meanings to understand Argentina’s economy during the two years of President Javier Millay’s government, or whether we need to add another theoretical tool.
What I would like to suggest in this short essay is that there may be a non-purist, non-realistic, practical way of understanding what is happening in Argentina. That is, one that recognizes reality but does not abandon principles. To help with that, let’s talk about political control.
I think it is indisputable that the Millais government created a primary surplus in the national budget in 2025. We might argue about how sustainable it is and how small it is. Perhaps one might even think that the accounting for unpaid but not yet paid interest on short-term bonds issued by the Argentine Treasury (LECAP) should be different. So even though there is a primary surplus of about 1.4% of GDP, the overall budget is a deficit of 1.3% of GDP rather than a surplus of 0.2% of GDP.
Still, the inflation rate has been around 30% annually for the past six months.
If we accept Milton Friedman’s concept of control, we must conclude that monetary policy was expansionary, despite the administration’s reasonable protests that there was no more federal inflationary financing.
On the other hand, it is Sargent and Wallace’s unsavory monetarist arithmetic that perhaps explains the region’s current high level of inflation compared to the region’s annual average of 7.2% in 2025, after all, Argentina’s central bank is forced to help the Argentine government float its debt by monetizing some of it.
To make a long story short,[1] Compared to last year, the monetary base increased by 43% and M2 by 27%. More than 60% of central banks’ assets are loans and bonds to the central government (I’m not going to get into fine points, but this is debt monetization, plain and simple). Furthermore, more than 46% of central bank debt is non-monetary. So in addition to everything the central government is printing, the central bank is also borrowing.
The bottom line is that the Argentine government is increasing the supply of money in the economy (both the monetary base and means of credit) and is using these resources primarily to purchase foreign exchange reserves.
The argument behind Friedman’s control concept applied to this situation is that an increase in the money supply is intended to match an increase in the demand for money in the economy. Sustained inflation of more than 30% per year has already disproved this claim. It should be obvious by now that no such demand exists in the economy, and given that, neither simple monetarist explanations nor rational expectations can explain what the Argentine government is doing.
An alternative explanation, based on the two frameworks we have considered so far, is that governments are well aware that fiscal policy is insufficient to anchor monetary expectations, and that after an annual inflation rate of more than 200%, the public can consider 30% safe. Meanwhile, the government is buying time to pass several structural and microeconomic reforms in Congress that could effectively reduce the cost of doing business in Argentina and get the economy growing again.
This is why I propose a third theoretical framework for understanding what is happening in Argentina. That is what classifies the Millais government as pragmatic rather than pragmatic.
The framework, formally known as the “fiscal theory of the price level”, was proposed primarily by John Cochrane and more recently in a booklet titled “Inflation.”
To be honest, I prefer to express my arguments less formally. And he found it in Jacques Roueff’s theory of rights, first proposed in 1945’s “Social Order.”
Mr. Ruev’s argument, at the risk of oversimplification, is that during the budgeting process, governments can make claims on real assets for which the tax capacity is insufficient to pay for them. If that were all there was to it, economic agents would adjust their expectations to the real purchasing power of the government’s claims and accept them only at a discount. But the government has another ploy in mind. It could force the central bank to accept these claims at a discount, at face value rather than the market price. Therefore, depending on whether a particular economic entity has access to the central bank’s discount window, some government debt will trade at par and others at a discount.
By the way, Alex Chahuen and I have already applied Ruev’s ideas to understand Millay’s policy. You can read it here. This essay is another application of that framework to new data.
Expected purchasing power, or expectations of economic agents to be paid in nominal terms, continue to materialize as government claims approach maturity.
Mr. Milais began his government by promising not to default on the national debt. Formally, he has kept that promise. However, given the amount of debt inherited from the previous administration and the limits of national budget cuts, even if a primary budget surplus is achieved, some level of debt monetization is still realistically necessary. A significant number of economic actors in Argentina are able to see through this and downplay the value of government obligations. It takes the form of low demand for pesos and peso-denominated debt, which explains the persistence of current inflation.
In the meantime, if the latest economic activity figures are correct, they show the economy is growing and confidence in reforms is growing, potentially lifting Argentina out of debt.
That’s the best interpretation I can give. As someone who wishes Argentina well, I hope that’s true.
[1] Readers interested in data should check out Reform Watch’s excellent Currency Monitor tab, created by Guatemala’s Universidad Francisco Marroquín.
