A MODEL OF INFLATION IN CENTRAL AMERICA .

The article develops an alternative model of price inflation in Central America. Despite the enormous interest shown in Latin America's inflationary experience through the monetarist-structuralist debate, there has been relatively little empirical work on the determinants of inflation. Structuralists claim that the Central American experience fits their model; they argue that the relative stability of the Central American republics can be explained by their backwardness. The collapse of export earnings, it is said, did not result in the development of alternative growth programmes based on import substituting industrialisation, because there was no industrial base to expand nor large urban population to pressure government into deficit financing. Equilibrium was therefore restored at a lower level of output, incomes, exports and imports, and the foreign exchange bottleneck did not arise. The absence of serious migration from the rural to the urban areas prevented the food supply bottleneck from emerging and the control of the banking system by foreigners prevented the government from resorting to inflationary financing. This article develops a model which is tested against the recent price inflation, but as it also satisfies the other two conditions, it is argued that it represents a general theory of inflation for Central America.