MODELING THE SOFT BUDGET CONSTAINT: INFLATION EXPLAINED BY A DISEQUILIBRIUM IN THE CIRCUIT OF CAPITAL

The article presents a two equation model showing how a disequilibrium between financial capital and real capital is a measure of the degree of a soft budget constraint situation, how such a disequilibrium can originate from price changes, interest rates or other international causes influencing the exchange rate. This is modeled by a circuit equation which is linked to a price equation via the mark up coefficient where it will be assumed that state (or private) enterprises can always cover their current costs and investment costs either by manipulating the selling price or by borrowing at cheap conditions or by getting subsidies or tax exemptions.