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Credibility Effects of Price Controls in Disinflation Programs

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  • Pierre-Richard Agénor

Abstract

This paper examines whether price controls may enhance the credibility of a disinflation program, using a framework in which agents behave strategically. The analysis indicates that a partial price freeze is not fully credible, and may result in inflation inertia. The authorities may be able to determine optimally the intensity of price controls so as to minimize the policy loss associated with a discretionary monetary strategy. But the optimal intensity of controls is shown to be significantly different from zero only if the cost of enforcing price ceilings is not too high, or if the weight attached to price distortions in the policymaker’s loss function is small.

Suggested Citation

  • Pierre-Richard Agénor, 1992. "Credibility Effects of Price Controls in Disinflation Programs," IMF Working Papers 1992/083, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1992/083
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    References listed on IDEAS

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    1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    2. Helpman, Elhanan, 1988. "Macroeconomic Effects of Price Controls: The Role of Market Structure," Economic Journal, Royal Economic Society, vol. 98(391), pages 340-354, June.
    3. Kiguel, Miguel A & Liviatan, Nissan, 1992. "When Do Heterodox Stabilization Programs Work? Lessons from Experience," The World Bank Research Observer, World Bank, vol. 7(1), pages 35-57, January.
    4. Persson, Torsten & van Wijnbergen, Sweder, 1993. "Signalling, Wage Controls and Monetary Disinflation Policy," Economic Journal, Royal Economic Society, vol. 103(416), pages 79-97, January.
    5. Cox, Charles C, 1980. "The Enforcement of Public Price Controls," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 887-916, October.
    6. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, April.
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    Cited by:

    1. Agenor, Pierre-Richard & Asilis, Carlos M., 1997. "Price controls and electoral cycles," European Journal of Political Economy, Elsevier, vol. 13(1), pages 131-142, February.
    2. Mario Reyna-Cerecero & George Mavrotas, 2003. "Inflation, Output and Perfectly Enforceable Price Controls in Orthodox and Heterodox Stabilization Programmes," WIDER Working Paper Series DP2003-44, World Institute for Development Economic Research (UNU-WIDER).

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