The Disequilibrium Model in a Controlled Economy: An Empirical Test of the Barro-Grossman Model
Abstract
Robert Clower has presented a hypothesis of household behavior under conditions of involuntary unemployment; in his analysis, Clower contends that a constraint in labor supply implies a decrease in demand for consumer goods. Robert Barro and Herschel Grossman (1971, 1974) generalized Clower's analysis to include the case where the quantity of consumer goods available is less than the demand at the going price, i.e., the case of excess demand. The Barro-Grossman disequilibrium model provides a framework for analyzing the effects of repressing inflation by means of price controls. The model predicts that such a policy will lead to increased saving and, more importantly, a reduction in labor supply. The latter response will have a multiplier effect on outptit. Given the potential importance of the implications of these effects, particularly the labor supply response, it would seem of utmost importance to test this model empirically. Such tests must have two objectives: to test the direction of response, i.e., the predictive ability of the theory; and to measure the size of the response. This paper is an attempt to accomplish these two objectives. The Soviet Union is chosen here as a case study. It is generally believed that there was repressed inflation in the Soviet economy during the period 1955-67,1 the years chosen for this study. Although conditions were getting better during this period, many of the controlled prices on the official retail markets were set below market-clearing levels; thus creating the possibility of the various spillover effects referred to by Barro and Grossman.2 A model similar to that of Barro and Grossman is applied here to the Soviet household sector. For the Soviet case one other market must be introduced, the uncontrolled or free consumer good market (for example, the collective farm market). Prices and availability of goods on the state and cooperative retail market are government policy parameters and these prices are usually set below marketclearing levels. Household saving mostly takes the form of increases in savings deposits (and cash hoards). The disequilibrium model predicts that if the amount of goods available on the state and cooperative retail market decreases (increases) then labor supply decreases (increases), demand on the collective farm market and other free markets increases (decreases), and saving increases (de* International Finance Division, Federal Reserve Board. Most of this research was done at the University of Virginia and was supported by the Thomas Jefferson Center Foundation of Charlottesville, Virginia. This paper represents my views solely and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or other members of its staff. I would like to thank the managing editor and an anonymous referee for helpful comments on an earlier draft of this paper. For a brief discussion of the evidence for this belief, as well.as a partial listing of those holding it, see the author (1975, pp. 57-59). For another partial listing of those who hold the belief, as well as a dissenting view, see Richard Portes. 2 In fact, they refer to the applicability of their model to the situation in the U.S.S.R. See Barro and Grossman (1971, p. 91, fn. 18).
- Sources
- openalex