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Discussions with Michael Gavin and Peter Wickham helped to illuminate the model, while Catherine Fleck provided editorial assistance.
Proponents include, in addition to the sources mentioned above, Birman (1980), Belkin and Ivanter (1983, p. 108), Goldman (1983, pp. 55, 98), and Bornstein (1987). Critics include Alexeev (1988, 1991), Alexeev, Gaddy, and Leitzel (1990) and Cochrane and Ickes (1991). In most of the discussion, monetary overhang is identified with forced savings, although the former could in principle exist without the latter--say, if price decontrol would reduce transaction demands for money. Also, if relative wages are artificially high and nominal wages are sticky, prices might surge after decontrol even if money holdings are minimal.
The elasticity of substitution is 1/(1-γ). Technically the expression is not defined when γ =0, but it converges smoothly to logarithmic utility as γ approaches 0.
This assumption is not necessary in cases where nominal government debt is increasing over time.
The discussion assumes that the composite goods price before decontrol are less than or equal to the long-run equilibrium price. This seems to be the typical case in practice. Formålly, the concepts of “price jumps” and “wage compression” are intended to be forward-oriented; that is, the initial price or wage is compared with their long-run equilibrium values.
The one exception is ∂P0/∂k, which takes the sign of (1-μ)ωA + [(l+b)ω-(1-a)(1+ic)]W0. The main source of uncertainty is the possibility that the initial monetary overhang is negative, in which case real wages initially overshoot their long-run value. In the more policy-relevant case of a positive overhang, it can be shown that μ ≤ i-r is a sufficient condition for P0 to rise with k.
A share of enterprise profits could be used to finance internal investment. However, since the model does not distinguish between productive and unproductive spending, and since credit markets are assumed to be frictionless, little harm is done by aggregating the enterprise and government accounts.
In Poland, when the government liberalized prices in January 1990, the real wage fell by 58 percent in the first two months. By the end of the year, however, the real wage had recovered to 73 percent of its level prior to liberalization (Calvo and Coricelli (1992)). If we assume that the real wage on the eve of price reform was close to the long-run level, and that exogenous wage drift roughly matched inflation, then the k for Poland can be estimated at about 0.5.