Measuring inflation under rationing: A virtual price approach

Christophe Starzec () and François Gardes
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Christophe Starzec: Centre d'Economie de la Sorbonne - Paris School of Economics, https://centredeconomiesorbonne.univ-paris1.fr

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: The presence of rationing or more generally of the situations of constrained demand can make the traditional methods of measuring inflation questionable and give an erroneous image of the reality. In this paper, we use the virtual price approach (Neary, Roberts, 1980) to estimate the real inflation level in a centrally planned economy (CPE) with administrated prices. In the first part of the paper, we discuss various methods used in CPE's to evaluate the real level of inflation by the market disequilibrium indicators or proxies which take into account rationing and incomplete information. In the second part of the paper, we apply the virtual price approach to compute the real inflationist gap between demand and supply under rationing in Poland's centrally planned economy with administrated prices in 1965-1980 period. We estimate for this period the model of consumer behaviour under rationing and recover the virtual prices reflecting the real cost of purchasing rationed goods following Neary, Roberts' (1980) and Barten's (1994) methodology. The results show a very large difference between official and virtual price of food considered as the most rationed good (up to 500%). The natural experiment of shift from the centrally planned economy to the market economy (or from rationing to market equilibrium) observed in Poland during the “shock therapy” (1990) confirms the scale of estimated by the model gap between the official (administrated) and market prices

Keywords: Consumer demand; rationing; inflation; virtual prices (search for similar items in EconPapers)
JEL-codes: D12 D45 E31 P36 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2014-01
New Economics Papers: this item is included in nep-cba and nep-mac
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ftp://mse.univ-paris1.fr/pub/mse/CES2014/14001.pdf (application/pdf)

Related works:
Working Paper: Measuring inflation under rationing: A virtual price approach (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:14001

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