Price Controls and the Variability of Relative Prices

Abstract

RECENT LITERATURE that explains relative price variability within a partial inforrnation multimarkets framework typically assumes that prices in all markets are deterrnined by market clearing. 1 However, in many countries a certain number of prices is either directly set by the government or regulated by it. In Israel, for example, the government is directly involved in setting the prices of some basic foodstuffs, fuels, electricity, public transportation, and a number of other items.2 Adjustments in the prices of these goods are made at discrete intervals and are widely and instantaneously disseminated by the media. As a result individuals in all markets have up-to-date inforrnation on that component of the general price level which is set by the government. In terrns of the islands paradigm this means that the component of the general price level which is confused with relative price movements is smaller than the same component in an economy in which all prices are freely deterrnined by the market. The purpose of this article is to explore the implications of this modified inforrnation structure for relative price variability within a partial inforrnation framework

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