Monetary Overhang

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MONETARY OVERHANG

Monetary overhang consists of the liquidity that quantity-constrained consumers may accumulate in excess of the money they would accumulate if commodities were freely available in the market.

Prices in the Soviet-type consumer goods market were in principle supposed to be set so that supply and demand would balance both in the aggregate and for each consumer good. Deficits caused by below-equilibrium prices were not a goal. But in practice many prices—particularly those for basic essentials like food, housing and many services—were set low either as a consumption subsidy or for ideological reasons. Also, because price stability was a goal, prices were not adjusted often enough to respond to changes in producer cost and consumer preferences. While there was excess supply for some goods, typically many goods were in short supply and were not freely available in the market. Consumers faced quantity constraints; they possibly accumulated money in excess of the amount they would have wished to have. This excess money or forced savings is called monetary overhang.

The economics of monetary overhang remain contested. While the existence of short supply for individual goods is generally accepted, whether there was undersupply in the aggregate remains somewhat debatable. The existence of the gray economy and kolkhoz (open collective farm) markets, where prices were freely determined by supply and demand, might be expected to have balanced aggregate demand and supply. But perhaps such consumer goods markets were too limited in size to have the necessary effect. Also, consumers who accumulate monetary overhang might be expected to diminish their labor efforts. Thus, forced savings would lower economic growth. But perhaps that was not institutionally possible.

Empirical research into monetary overhang is hampered both by theoretical problems and by deficient statistics. It is estimated that the share of forced savings in total Russian monetary savings increased from 9 percent in 1965 to 42 percent in 1989. This was largely caused by retail price subsidies, which swelled to 20 percent of state budget expenditure in the late 1980s. Undersupply caused queuing, black markets, bribery, and quality deterioration. Few consumer goods were freely available by 1991.

Monetary overhang can also be seen as repressed inflation: In the absence of price controls, prices would rise to equilibrium levels. In principle, monetary overhang could be abolished before price liberalization by increasing consumer goods supplies, by bringing new commodities and assets to markets (for instance, through privatization), or by a confiscatory monetary reform. In practice, monetary overhang was abolished in transition economies through price liberalization, which turned repressed inflation into open inflation and destroyed the value of savings, both voluntary and forced. This was the case in Russia. The partial price liberalization of January 1992 brought about an annual inflation of 2,400 percent. Many consumers suffered badly, but price liberalization was popular overall, as the consequences of repressed inflation were well known.

See also: black market; economic growth, soviet; repressed inflation; wages