Academic journal article Journal of Money, Credit & Banking

Savings and Stabilization Policy in a Pre-Post-Socialist Economy

Academic journal article Journal of Money, Credit & Banking

Savings and Stabilization Policy in a Pre-Post-Socialist Economy

Article excerpt

IN THE LATE 1980s nominal incomes in the USSR rose rapidly while the nominal prices of consumer goods were essentially fixed. Unprecedented shortages emerged and savings soared: the ratio of household savings to disposable income increased from 7 percent in 1986 to 12 percent in 1989-90 (International Monetary Fund et al. 1991). A common interpretation of these developments was that Soviet consumers, being unable to spend their money, were "forced" to save. Forced savings, in turn, led to the accumulation of a monetary overhang, estimated by the IMF et al. to constitute one-third of annual disposable income in 1990. The chief implication of this line of reasoning was that the monetary overhang was a formidable obstacle in the transition to the market: if consumer goods prices were liberalized, households would spend a large part of the overhang, fueling inflation. A common policy recommendation was therefore to deal somehow with the monetary overhang before price liberalization.(1)

Nonetheless, in 1992, Russia and the other former Soviet republics embarked upon an extensive, though incomplete, policy of price liberalization, triggering massive increases in money prices. It might therefore seem that the warnings about the overhang were warranted, and were ignored at a potentially severe household welfare cost. However, in this paper we set up a simple macroeconomic model in which price liberalization is justified, regardless of the monetary overhang: there is a positive effect on the welfare of the representative household. Furthermore, in terms of "full price," which is the appropriate concept for considering household welfare, liberalization may be regarded as a deflationary policy.(2)

In section 1 we model household behavior in a two-period world. In period 1 the money price of the consumption good is fixed below market clearing and an informal queuing mechanism develops, so that households have to expend time, as well as money, to obtain the good. In period 2, however, the money price will be liberalized, and all agents know this in advance. Thus the model captures an important idiosyncrasy of the "pre-post-socialist" economy--the socialist economy on the verge of transition to the market. In section 2 we turn to the macroeconomic equilibrium and in section 3 we see how this equilibrium is affected by policy changes. In section 4 we examine the robustness of our results to various changes of assumption and in section 5 we summarize our main conclusions.

Theoretical literature on the macroeconomics of socialist economies is relatively sparse, though some recent papers have analyzed aspects of nonprice rationing using essentially the same two-period temporal structure as we do.(3) However, they mostly assume that goods are allocated by straight rationing, not by queues (for example, Feltenstein, Lebow, and Van Wijnbergen 1990 and Van Wijnbergen 1992). This leads to different policy conclusions because straight rationing, unlike queuing, does not entail wasteful activity. Closer to our analysis are papers by Fender and Laing (1991, 1993) which have the same temporal structure and assume queuing. Their approach is more restrictive than ours in that they exclude leisure form the utility function, while it is more general than ours in that they model labor supply endogenously. They are concerned particularly with the output effects of policy changes, whereas we focus on savings behavior and stabilization policy.

1. THE MICROECONOMIC MODEL

Consider a representative household which receives wage income from the government and spends it at government stores on the single (composite) good. In period 1 the price of the good is fixed below market clearing and the household has to queue to get the good; in period 2 the price is free, the market clears and there are no queues. Thus period 1 (2) represents the economy before (after) price liberalization.

The household utility function is

[MATHEMATICAL EXPRESSION OMITTED] where [c. …

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