How Parallel Markets Fueled Chronic Shortage in the Soviet Official Sector
43 Pages Posted: 17 Dec 2007
Date Written: 1999
Abstract
The paper presents a disequilibrium model of a pre-transition centrally planned economy, with explicit description of labour supply to the official sector, as well as illegal economic activities. Under weak assumptions, raising official prices for deficit goods leads to even higher inflation in the shadow sector and increases the labour supply to the official sector. However, aggregate supply does not grow as much as income, and (flow) excess demand in the official sector goes up, while excess demand in the aggregate market remains positive. Simulation results suggest that our assumptions and conclusions are consistent with estimates of monetary overhang obtained (in a different way) by other authors.
Keywords: communist economies, disequilibrium, informal economy, labour supply
JEL Classification: E26, E31, J22, P2, K42
Suggested Citation: Suggested Citation