Hidden and repressed inflation in Soviet-type economies : definitions, measurements and stabilisation

Abstract

In Soviet-type economies inflationary pressures, often reduced but not eliminated by central planning, take the form not only of open officially recorded inflation but also of hidden inflation (i.e. a differential between official price indices and the actual cost of living to consumers) and of repressed inflation (i.e. rising excess demand for goods and services at the actual prices in the state and non-state sectors). This paper reviews inflationary trends, the persistence of inflationary pressure under central planning and definitional problems for alternative types of inflation. Estimates of hidden inflation in recent literature are reviewed and generally found to understate the price differential in the controlled and uncontrolled markets. The wide divergence between recent estimates of repressed inflation, ranging between near-equilibrium and catastrophic imbalance, is then discussed. By and large excess money holdings in the economy as a whole (i.e. with reference to the two-tier market for consumption goods) are found to be small, but this is seen as consistent with large-scale imbalance in the state sector. A model is presented illustrating the complexity and time profile of repressed inflation definitions and measurements, due to the difference between the price level which would preserve equilibrium if it had been prevailing for a sufficiently long period, and the price levels (depending on the speed of adjustment) and their time paths which can restore market clearing at single prices starting from a two-tier market in a state of imbalance. Alternative stabilisation paths and their combination are also investigated, using as policy instruments the price level, a liquid wealth tax (or currency conversion) and supply improvements. The costs of hidden and repressed inflation are discussed and found to be greater than the cost of open inflation. In sum, the task of stabilisation in Soviet-type economies is seen as large-scale, time-consuming and complex, and its implementation imperative.