The Real and Monetary Impacts of Exogenous Economic Disturbances Upon Centrally Planned Economies: With an Application to Poland

Abstract

The impact of international economic disturbances upon the centrally

planned economies (CPEs) of the Soviet Union and Eastern Europe has been a

particularly important area of research. Neuberger and Tyson (1980) and the

numerous contributors to that volume provide a bench mark for the development

of open economy macroeconomics of CPEs. This paper provides an extension of

the work of Wolf ( 1978b), ( 1980), inter alia, for the CPE and modified

centrally planned economy (MCPE). The analysis below explicitly considers the

real and monetary impacts of exogenous disturbances in a model with two types

of monies - enterprise deposits and household currency - and both consumer

goods and intermediate products (or capital services), each of which may have

a fixed or market determined price. The model is unique not only in its

detail but also in that it provides a flow of funds approach which

incorporates wealth effects. The fundamental result is that exogenous

disturbances do have an impact - either real or monetary - upon the domestic

economy of the CPE even though price-equalization taxes or subsidies eliminate

the most direct potential impacts. Only via a finely tuned policy of price or

tax (subsidy) adjustments or the imposition of trade controls can the impact

be completely eliminated. This result is contrary to the accepted wisdom that

the price-equalization mechanism in CPEs completely and automatically

insulates the domestic economy.