A Simple Monetary Model of a Shortage Economy

30 Pages Posted: 15 Feb 2006

See all articles by Shoukang Lin

Shoukang Lin

affiliation not provided to SSRN

Date Written: August 1992

Abstract

During the transition from a centrally planned economy to a market economy, many countries seem to have experienced some degree of macroeconomic instability. This paper attempts to provide a theoretical explanation of this phenomenon. The paper develops a simple monetary model and shows how macroeconomic stability can be achieved in a rigid centrally planned economy, despite the inherent structural imbalances and irrational price system. On the other hand, the study shows that without hardening enterprise budget constraints, wage and price decontrol tends to destablize the economy and may lead to persistent budget deficits and inflation. The paper also provides a rigorous analysis of household savings and money demand in a shortage economy, and clarifies the somewhat confusing concept of "monetary overhang" in the literature.

JEL Classification: D59, P22, P23

Suggested Citation

Lin, Shoukang, A Simple Monetary Model of a Shortage Economy (August 1992). Available at SSRN: https://ssrn.com/abstract=884940 or http://dx.doi.org/10.2139/ssrn.884940

Shoukang Lin (Contact Author)

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