- Intertemporal speculation, shortages and the political economy of price reform
- Economic Journal
- Volume | Issue number
- 102 | 415
- Number of pages
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
Price controls often focus on commodities that are storable and can thus be used in intertemporal speculation. Second, opposition to dismantling of controls is often based on claims of low supply response, and greatly bolstered if a strong supply response fails to materialise. This is especially relevant in Eastern Europe, where experience with markets is limited. We show the difficulties that these two factors create for gradual decontrol of prices. We endogenise the probability of a collapse of the reform programme and show that such endogeneity in the presence of intertemporal speculation leads to a strong case against gradualism. The smaller the initial price increase, the lower the observed supply elasticity and the greater the probability that the programme of reform will be abandoned. This implies that the policy that makes most sense from a microeconomic point of view (decontrol immediately) is also advisable from a macroeconomic point of view. Credibility problems, which are at the core of the transitional output losses that characterise most stabilisation programmes, will be much less under a cold turkey approach and so will therefore transitional unemployment.
- go to publisher's site
If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library, or send a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible.