Estimation of Sensitivity of Russian Household Consumption to Permanent and Transitory Income Shocks Using Kalman Filter

This paper estimates the sensitivity of Russian household consumption to permanent and transitory income shocks with a quasi-maximum likelihood method based on the Kalman filter based on data from the monitoring of the health and economic welfare of households and individuals in the Russian Longitudinal Monitoring Survey (RLMS) of the Higher School of Economics. Estimates are presented for several specifications of labour income and total income. Consumption is found to be more sensitive to permanent earnings shocks than to permanent total income shocks, due to the greater volatility of the latter. Differences in the consumer behaviour of different social groups are also analysed, showing, in particular, that older households and households with children are more sensitive to permanent income shocks. Low-wealth households are more sensitive to permanent income shocks than high-wealth households, which may be due to precautionary savings. The difference in the consumption behaviour of small and large households may be due to the effect of an additional worker. Additional analysis of this effect reveals that households do increase the number of employed members in response to a negative income shock. Moreover, large households increase the number of working members more quickly. The study of the dynamics of household consumption behaviour is conducted through the construction of a permanent income series.