Working Paper: CEPR ID: DP510
Authors: Sweder van Wijnbergen
Abstract: How should countries like Poland or the USSR move towards price flexibility, gradually or in a `big bang'? Why is it that governments committed to eventual price flexibility so often seem to be unable to let go of `temporary' controls? How can one explain that after price increases early in a programme of price controls, one often sees output rise while at the same time shortages also seem to increase? This paper argues that intertemporal speculation, hoarding and the political economy of price reform go a long way towards explaining all these puzzles. We show that the interaction between shortages and political vulnerability of reformist governments to early perceptions of failure make for a strong argument against gradualism in the decontrol of prices.
Keywords: price reform; liberalization; intertemporal speculation; credibility
JEL Codes: 023; 311; 431
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| gradualism in price decontrol (P22) | increased likelihood of perceived failure among reformist governments (P27) |
| shortages and political vulnerability (F52) | gradualism in price decontrol (P22) |
| gradualism in price decontrol (P22) | increased hoarding behavior (E71) |
| increased hoarding behavior (E71) | decreased observed supply elasticity (H31) |
| decreased observed supply elasticity (H31) | increased probability of reform collapse (P27) |
| cold turkey approach to price decontrol (E64) | more credible reform (E69) |
| cold turkey approach to price decontrol (E64) | eliminates incentive to hoard (D16) |
| cold turkey approach to price decontrol (E64) | aligns expectations of future prices (G13) |
| cold turkey approach to price decontrol (E64) | stabilizes supply responses (E63) |
| gradualism in price decontrol (P22) | smaller initial price increase (P22) |
| smaller initial price increase (D49) | lower observed supply elasticity (H31) |
| lower observed supply elasticity (H31) | heightened risk of program abandonment (I21) |