Economic stabilization with price controls

Abstract

On June 14, 1985, the Argentine authorities announced a new stabilization plan based on three basic measures. First, prices of public sector enterprises were increased substantially in order to close their cash flow deficits. Second, all prices, both public and private, were frozen at the level prevailing on June 14. Third, the President promised in a public speech that starting June 14 the Central Bank would not print any more money to finance public sector operations. A few days after the announcement, the plan was accepted by the IMF, since it essentially respected the monetary and fiscal goals of the Stand-by agreement reached during the previous week. Although the plan was presented as a “new” approach to the problem of stabilization, there is not much new with respect to what has been traditional in Argentina –except for the public commitment of the President to put an end to the monetary financing of the public sector. The high inflation rates of recent years were reflected throughout the economy in high interest rates, indexation schemes, and all kinds of contracts with deferred payments. In order to consider this problem, the government made legal provisions to adjust contracts based on a table that contemplates the difference between the previous expected inflation and the new one generated by the stabilization plan, a measure aimed at avoiding unexpected wealth transfers in the event that the plan actually works. The purpose of this work is to present some conclusions regarding the dynamics of a stabilization program based on fiscal discipline and price controls. All other aspects –such as exchange rate policy, external debt, and restrictions on capital movements– are ignored or intentionally left aside for a more complete study. Several of these aspects are the object of a long-term research project undertaken by the authors.

JEL classification: E31 ; E52 ; E63 ; E64