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The Disequilibrium Model in a Controlled Economy: Comment

by Barbara G. Katz

Paper (PDF Format)

Abstract

This article presents the author's comments on a paper by David Howard about the predictive ability of the Barro-Grossman (B-G) disequilibrium model applied to the Soviet Union economy. The B-G model focuses on the responses of saving and labor supply to conditions of excess demand, defined as the case where at the prevailing price, the demand for consumer goods exceeds their supply. The B-G model predicts that under conditions of excess demand, referred to also as repressed inflation, an increase in the quantity of goods available leads to a decrease in saving and an increase in labor supply, with its consequent multiplier effect on output. Howard tailors the B-G model to the Soviet economy by including an uncontrolled market, specifically the collective farm market, and by eliminating the role of profits as an argument in the effective saving and labor supply functions. While the B-G model supplies an important theoretical framework for predicting responses to changes in the constrained availability of goods, the model is difficult to test empirically. Moreover the methodology used by Howard is flawed in several ways. An adequate measure of the supply of goods available on the constrained market is needed to test the B-G model.