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Measuring inflation under rationing: A virtual price approach



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

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  • Christophe Starzec & François Gardes, 2014. "Measuring inflation under rationing: A virtual price approach," Documents de travail du Centre d'Economie de la Sorbonne 14001, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  • Handle: RePEc:mse:cesdoc:14001

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    1. Neary, J. P. & Roberts, K. W. S., 1980. "The theory of household behaviour under rationing," European Economic Review, Elsevier, vol. 13(1), pages 25-42, January.
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    More about this item


    Consumer demand; rationing; inflation; virtual prices;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • P36 - Economic Systems - - Socialist Institutions and Their Transitions - - - Consumer Economics; Health; Education and Training; Welfare, Income, Wealth, and Poverty

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