hat’s more, producers increased the prices of their goods and services in order to relay the increased production costs. This is referred to as cost-pull inflation. The lack of ability to secure imports in Venezuela contributed to the rise in production costs. This played a role in the further hindrance of Venezuela’s domestic production (Profolus 2018).

Under Maduro’s regulation, the money supply and minimum wage were increased, in attempt to manage consumer spending capabilities, as already discussed. The monetary explanation – is partially applicable when trying to understand the causes of Venezuela’s hyperinflation and it states that the idea of excess money supply with the same amount of goods leads to the decrease in value of a currency.

The current state of Venezuela, demonstrates the profligacy exhibited that lead to fiscal dominance of monetary policy. In attempt to diminish the gap between spending and revenue, a government may decide to fund expenditures via tax revenues – bonds that are to be paid back through future tax revenues or through central bank seigniorage – could be implemented. Seigniorage reliance from the government is likely to govern a lack of incline to continue using a currency which is losing value. Part of the seigniorage serves a purpose as an inflation tax. The rate of inflation acts as a tax rate therefore an increasing rate of inflation would result in higher levels of revenue for the government. This however, is dependent on the public’s willingness to maintain real money balances as an increase in inflation means a decrease in money balances available for public holding – potentially limiting the revenue generated by the government. In essence, hyperinflation can potentially be perceived as a large scale taxation scheme.

During periods of inflation, the real purchasing power of tax revenues decline. Constant expenditures lead to a larger budget deficit as a result of the reductions in the real value of revenues. This tendency of inflation to increase the real budget deficit is referred to as the Tanzi effect. During hyperinflation, however, the Tanzi effect reduces the real value of tax revenues.

It’s deemed that so long as individuals remain confident in fiscal authorities and their ability to respond to inflation – via the means of increasing taxes or decreasing expenditures – they will hold money as a means of exchange and store of value. However, upon the emergence of the Tanzi effect, people’s confidence in the gov