Standard analyses of high inflation episodes usually assume that the real interest rate is either a constant or suffers changes small enough to be safely ignored. However, in several highly indebted countries, the real interest rate is perhaps the single most important variable affecting the government budget.
This paper presents a model where the real interest rate affects the demand for money and debt, thus helping to explain the recent experience of Argentina. The model also provides a new perspective to the analysis of several issues in stabilization and monetary theory. One issue is the possibility that increasing the fraction of the deficit financed with bonds, instead of money creation, might increase inflation. In contrast to previous literature, this result is obtained for an economy that may be on either side of the Laffer curve.

Other issue is that, as unique solutions are possible on both sides of the laffer curve, a "high inflation trap" is not possible; and the old remedy to cure inflation by reducing deficits or increasing primary surplus will always work, independently of how high is the prevailing rate of inflation.