DP510 | Intertemporal Speculation, Shortages and the Political Economy of Price Reform: A Case Against Gradualism

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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.