Venezuela's Lagged Price Adjustment: Inflationary Pass-through, Consumption and Distributional Impacts, and (Potential) Policy Implications

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Author
Olivo, Víctor;
Date
Jun 2020
This work seeks to estimate the impact of the adjustment in the prices of a series of goods and services that have been regulated for 20 years, something that implies high magnitudes. Using Input-Output and Social Accountability matrices, we find that the overall (direct and indirect) effect on the general price level of simultaneous price increases of 10% on fuel, telecommunications and public services could be around 0.67%, whereas a 10% devaluation entails a 2.83% impact. Comparing between lowest and highest income deciles, a simultaneous 10% increase in all the above-mentioned products plus wages and the exchange rate, implies a 5.58% increase in expenditures of the lowest income household (5.56% in the highest), whereas it represents 12.43% of its income (3.6% in the highest). The results from an econometric exercise for the prices of fuel, electricity and broadband controlling for domestic currency, overall liquidity, and direction of the adjustment, reveal pass-through of 0.62%, 0.71% and 0.32%, respectively for each 10% increase on these prices; mostly in line with the input-output matrix approach and still rather low. Thus, no matter how low the pass-through is, given the magnitude of the price adjustment (due to the lags), it has welfare and distributional effects. A strategy to mitigate such impact in the middle of a humanitarian crisis and in a sustainable way is evaluated according to different policy scenarios. Overall, the results from a financial program framework suggest that a gradual approach for adjusting fuel and regulated services prices, together with mitigating measures, although fiscally costlier (but certainly cheaper than the status-quo) may produce outcomes in terms of GDP growth and inflation that are better than those obtained with a strategy of upfront adjustment in prices without mitigating measures.