How Parallel Markets Fueled Chronic Shortage in the Soviet Official Sector

43 Pages Posted: 17 Dec 2007

See all articles by Mihails Hazans

Mihails Hazans

University of Latvia; IZA; GLO; BICEPS

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

Hazans, Mihails, How Parallel Markets Fueled Chronic Shortage in the Soviet Official Sector (1999). Available at SSRN: https://ssrn.com/abstract=1074502 or http://dx.doi.org/10.2139/ssrn.1074502

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