Bryan W. Roberts, Dept. of Economics, Univ. of Miami, Florida

[1] I would like to thank Andrew Berg of the IMF for valuable discussion on this paper. Back to Text

[2] Roberts (1994a) develops a formal model and applies it to the Polish transition. The empirical results show that household welfare probably increased in the first year after the Polish big bang of 1990. Welfare also probably went up in Russia in 1992 (see Roberts 1994b). Back to Text

[3] Van Wijnbergen (1992) develops a model linking price liberalization, government credibility, inter-temporal speculation, and goods hoarding. He shows that gradual price liberalization increases the chance of political failure of the reform program, due to the fact that a gradual liberalization leads to a small observed supply response. Back to Text

[4] See Sah (1987), Alexeev (1991), and Polterovich (1993). Back to Text

[5] See Roberts (1994a and 1994b) for a more extensive development of this model. Back to Text

[6] Note that xS + xF = xT. Back to Text

[7] Of course, the unified market price is treated as the post-liberalization official price by statistical agencies. Back to Text

[8] The inflation rate equals (pM-1)x100. Back to Text

[9] See Boone (1992) for a careful analysis. Back to Text

[10] In the case of Poland, price liberalization actually occurred in two stages. Official food prices were fully liberalized in August 1989, and other consumer prices in January 1990. Between August and January, official price inflation was high, probably as a result of the efforts of sellers to realign relative prices and the government's willingness to accommodate demands for price increases. Thus, the inflation burst associated with price liberalization is better viewed as taking place over August 1989-January 1990, and months -5 to -1 are March-July 1989. Monthly and average annual inflation rates become:

March (-5) 8.0%

April (-4) 9.8%

May (-3) 7.2%

June (-2) 6.1%

July (-1) 9.6%

8/88-8/89 (year prior to month 0) 7.1%

[11] See Sachs (1993) for a careful discussion. Back to Text

[12] Roberts (1994a), p.77. Back to Text

[13] Rocznik Statystyczny 1990. Back to Text

[14] Berg and Sachs (1992). Back to Text

[15] Some have argued that large-scale aid from the U.S. is unlikely (Cardoso and Helwege 1992). I find their view to be too pessimistic. The U.S. government already feels a great deal of pressure to prevent a massive Cuban migration. This pressure may intensify if the Castro government falls, as the successor government will presumably weaken its rights to impose draconian restrictions on those wishing to leave. Back to Text

[16] There has not been a massive flow of foreign capital into the Eastern European and FSU countries. A great deal of capital has been invested in China, but the Chinese government enjoys a level of credibility that the initial post-Castro government will not. Back to Text

[17] See Dornbusch (1987) for a formal treatment. Back to Text

[18] See Osband and Villanueva (1992) for an excellent review of currency board operation and associated analytic issues. Back to Text

[19] The currency board holds foreign currency in interest-bearing notes of the reserve-asset country. The interest paid on those notes includes an expected inflation component. See Osband and Villanueva (1992), p. 5. Back to Text

[20] Say that the economy has reached a long-run equilibrium. A fall in the terms-of-trade produces a trade deficit, fall in reserves and monetary contraction. A reserve-asset country monetary contraction increases the foreign interest rate which attracts domestic capital, causing a domestic monetary contraction. Back to Text

[21] Commodity prices appear to move as random walks, making liquidity constraints more likely. Back to Text