Internal Currency Markets and Production in the Soviet Union

This paper considers the impact of macroeconomic and microeconomic policy tools on enterprise activities within an economy in the process of economic reform. Assuming a dual exchange rate regime and the type of increased enterprise autonomy introduced as components of partial economic reform as in the Soviet Union, policy changes induce shifts in production and hard currency allocation decisions. This paper considers the implications for: the supply of hard currency to internal auctions or interbank markets; the free internal price of foreign exchange; export volumes; the trade balance; the supply of goods available for internal consumption; and open and hidden inflation. The concentration of market power of producers in domestic industries and the design of currency auctions or interbank markets are key determinants, respectively, of the magnitude and direction of the enterprise responses to policy changes and external shocks.