THE MACROECONOMICS OF NEP

The microeconomic problems of the Soviet New Economic Policy (NEP, 192 1-9) which are usually cited are here reinterpreted as the result of m acroeconomic imbalance. The Bolsheviks ended a hyperinflation in sprin g 1924, but they also began to impose price controls. Because price co ntrols were more effective in towns than in the countryside, relativel y moderated inflation during the next three years caused instability i n the effective terms of trade for agriculture. Measures to address th is problem, such as restricting private trade, worsened the situation and masked the price indicators which should have warned of an impendi ng crisis. NEP offers a cautionary tale about the danger of combining an inflationary macro policy and partial price controls, particularly in an economy with a large state sector.