Credibility Effects of Price Controls in Disinflation Programs

IMF Working Papers, October 1, 1992

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Credibility Effects of Price Controls in Disinflation Programs

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Bibliographic details

• Authors: Pierre-Richard Agénor
• Published: October 1, 1992
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451850482.001

Main findings

• The paper examines whether price controls may enhance the credibility of a disinflation program, using a framework in which agents behave strategically.
• A partial price freeze is not fully credible, and may result in inflation inertia.
• Authorities may be able to determine optimally the intensity of price controls so as to minimize the policy loss associated with a discretionary monetary strategy.
• The optimal intensity of controls is shown to be significantly different from zero only if:
  • the cost of enforcing price ceilings is not too high, or
  • the weight attached to price distortions in the policymaker’s loss function is small.

Analytical framework and mechanisms

• Strategic behavior by agents is central to the analysis.
• Price controls considered include a partial price freeze and price ceilings.
• Credibility effects are assessed in terms of their interaction with discretionary monetary policy and the resulting inflation expectations and inertia.

Policy implications and recommendations

• Implementing price controls can, under certain conditions, reduce the policymaker’s loss from discretionary monetary strategies.
• Policymakers should weigh:
  • enforcement costs of price ceilings, and
  • the relative weight assigned to price distortions in their loss function,

before opting for nonzero intensity of price controls.