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The author is Professor of Economics at the University of Kansas, and wrote this paper while he was a Visiting Scholar in the Research Department. He has benefitted from suggestions by Avinash Dixit, Anne Sibert, Lars Svensson, as well as colleagues in the Fund.
It should be noted that most of these papers do not look at the issue of price controls in the context of central planning. Rather, they consider market economies with distortions caused either by controls or by rationing.
Feltenstein, Lebow, and Van Wijnbergen (1990) examine this type of savings spill-over in the context of a life cycle model applied to China.
There is a great deal of current discussion of “Ruble overhang.” To quote the New York Times of December 6, 1989, “The biggest economic obstacle to price reform is ‘ruble overhang’. Soviet citizens are hoarding billions of rubles because - at the low, controlled prices - goods move instantly and there is nothing left on store shelves to buy.” There has also been considerable work attempting to empirically estimate the extent to which there has been “Yen overhang” in China following the economic reforms of 1979. Among the papers looking at this issue are Feltenstein and Farhadian (1987), Feltenstein, Lebow, and Van Wijnbergen (1990), Feltenstein and Ha (1990), and Portes and Santorum (1987).
The Chinese refer to the enormous nominal stocks of savings, represented by interest bearing bank deposits, that have accumulated since the beginning of liberalization as a “tiger in a cage”, reflecting the fear of the consequences of large withdrawals of these savings deposits.
We thus do not claim that the partial liberalization of price controls has been implemented as the result of any type of optimizing behavior. Rather, we view the pattern of price controls as being an exogenously imposed constraint.
It should be noted that indirect taxation has generally been the most important source of revenue in planned economies. This partly reflects ideological beliefs that the current distribution of income is correct.
This phenomenon is quite apparent in China where, between 1979 and 1983, M2 grew by 223 per cent while the cumulative increase in the consumer price index was only 17 per cent.
Thus money holdings in period 1 are determined so as to maximize intertemporal utility. In period 2 they are determined as a constant fraction of income.
The consumer thus recognizes the market demand shortage of good G’ and reduces his demand to equal the current market supply.
A derivation of Walras’ law for the model is available upon request from the author.
We use the Lahey F77L 32EM compiler for a 386 computer. On a 20 Mz 386 the program takes approximately 40 seconds to converge.
The source of all our data is Statisticka Rocenka Ceskoslovenske Socialisticke Republiky 1989. For production coefficients we take the coefficient of labor to be the 1988 share of the wage bill in sectoral value added. The remainder is the share of capital. For sector 2 we have arbitrarily scaled the coefficients by 0.6 in order to have decreasing returns to scale.
This is derived by dividing the total wage tax in 1988 by total wage income.
This is the 1988 share of government spending in C + I.
These are the shares of capital and labor in the construction industry in 1988. We arbitrarily scale them by 0.4 to obtain a decreasing returns to scale production function.
To this we add the rate of depreciation of capital to arrive at a figure of 0.052 as in equation (3.19). This number may be adjusted if we wish to permit short-run capital deepening.
These are derived as the shares of net output of the corresponding sectors in total net output, since we do not have access to satisfactory consumption data.
This is derived as the 1988 value of domestic taxes on goods and services divided by GDP.
These are in 100 billion koruny. A unit of labor is defined as that amount which earned 1 koruny in 1988. Capital is defined similarly. Money is the stock of M2 at the end of 1988.
This is derived as financial savings divided by the wage bill (1988 figures). This figure can also be adjusted for different closure rules.
Thus 5.65 percent is paid in period 1 on initial money holdings, while 6.37 percent is paid in period 2 on money held at the end of period 1. These are the interest rate for 1988 and 1989, respectively, for investment credits for enterprises. The price control has been chosen at random.
This corresponds to the profit tax rate introduced in Czechoslovakia in 1989. The rate was reduced from previous levels of between 75 and 85 percent.