Intertemporal Speculation, Shortages and the Political Economy of Price Reform

How should countries like Poland or the U.S.S.R. move toward 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 program of price controls, one often sees output rise while at the same time shortages seem to increase also? This paper argues that intertemporal speculation, hoarding and the political economy of price reform go a long way toward explaining all these puzzles. The author shows that the interaction between shortages and political vulnerability of reformist governments so early perceptions of failure make for a strong argument against gradualism in the decontrol of prices. Copyright 1992 by Royal Economic Society.