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Inflation and Conflict in Iraq: The Economics of Shortages Revisited

David Grigorian () and Udo Kock ()

Review of Middle East Economics and Finance, 2014, vol. 10, issue 2, 22

Abstract: Containing inflation has turned out to be one of the most challenging aspects of economic management in Iraq since the invasion in 2003. This paper posits that conventional as well as unconventional factors explain inflation dynamics in the recent past. We build a theoretical model based on the insights into the workings of socialist economies under supply shortages in Shleifer and Vishny model to help explain price dynamics. In the model, strategic behavior of the distribution monopolist results in fuel shortages, with implications for fuel and non-fuel inflation. A number of discrete adjustments of administered prices for fuel products since December 2005 offer an interesting experiment to help study this behavior using the Shleifer–Vishny model. Our estimates confirm presence of strategic behavior in price fuel price setting and show that inflation was influenced by shortages in fuel supplies and by violence.

Date: 2014
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