Academic journal article The European Journal of Comparative Economics

Impact of Regulated Price Adjustments on Price Variability in a Very Low Inflation Transition Economy: Case of Armenia

Academic journal article The European Journal of Comparative Economics

Impact of Regulated Price Adjustments on Price Variability in a Very Low Inflation Transition Economy: Case of Armenia

Article excerpt

Abstract

This paper examines the impact of monetary policy and administrative price adjustments on price variability in a low inflation economy characterized by relatively frequent administrative price adjustments. Fluctuations of market determined prices, prices of agricultural goods in particular, are linked to poor synchronization between administrative price changes and monetary policy. If monetary policy does not account for expected changes in administrative prices, demand for free goods shifts, causing fluctuation of prices for agricultural goods, because the supply of these goods is highly inelastic in Armenia. The findings contribute to a better understanding of agricultural price variability during 1998-2002. The impact of macroeconomic policy and structural adjustments on income distribution and rural poverty incidence are also examined. This research has immediate policy implications, since Armenia will continue to undergo major upward price adjustments of regulated prices, which may have a negative impact on income distribution unless aggregate demand management is changed.

JEL Classification: E31, E61, E65

Keywords: Inflation, price variability, regulated prices

1. Introduction

The paper examines the impact of monetary policy and administrative price adjustments on price variability in a low inflation economy characterized by relatively frequent administrative price adjustments. In 1998-2002, price variability in Armenia was quite significant. Not only the distribution of relative prices was uneven in this period, which can be explained by major adjustments in administrative prices, but also price variability within the groups of "free goods" (prices for which are determined in the market was very significant, driven by fluctuations in prices for the main agricultural goods.

The statistical evidence shows that variability within the group of free goods is mainly lead by fluctuations of agricultural prices, which have been declining in the period of 1998-1999, and recovering in following years. The statistical evidence also shows that agricultural prices declined in the time when upward regulated price adjustments coincided with tight monetary policy, while agricultural prices recovered in the time of combination of expansionary monetary policy with no major revision of regulated prices.

The paper examines whether tight monetary policy at the time of major price adjustments causes increased variability of individual inflations by pushing the prices of certain free goods down and whether relaxed monetary policy causes increased variability of prices in time of constant regulated prices by pushing prices of free goods up. The paper finds that if monetary policy does not account for expected changes in administrative prices, demand in free goods market will shift causing fluctuations of prices for agricultural goods, as the supply of these goods is highly inelastic in Armenia.

The findings of the paper contribute to a better understanding of agricultural price variability during 1998-2002. The impact of macroeconomic policy and structural adjustments on income distribution and rural poverty incidence are also examined. This research has immediate policy implications since Armenia will undergo major upward price adjustments for goods and services with regulated prices, which may have a negative impact on income distribution if aggregate demand management is unchanged In the second section I present the main dynamics of relative price changes in Armenia in 1998-2002, examining in particular the behaviour of agricultural prices. The third section analyses the price variability and possible factors behind it Variances of individual inflations are considered and the contributions from administratively regulated versus market determined prices are studied In the fourth section I describe a theoretical framework that has been used to analyse this problem and apply it to the specifics of the situation in Armenia. …

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