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CPI Bias and Real Living Standards in Russia During the Transition

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Abstract

The economies of the former Soviet Bloc experienced large declines in output during the decade of transition which began with the collapse of the Soviet Union in 1991. Yet there are many reasons to believe that measured output and official deflators provide a poor proxy for the change in real living standards in transition economies. This paper uses the Engel curve methodology recently developed by Hamilton (2001) and Costa (2001) to examine changes in real living standards in Russia during the transition period and to provide an estimate of how much the officialRussian CPI has overstated consumer inflation. We also examine changes in consumer durables, home production, and subjective well-being to further evaluate changes in living standards. Our findings indicate that CPI bias has caused a substantial understatement of the growth performance of the Russian economy during the transition. Even just allowing household final consumption to be deflated with bias, we find that the level of real per capita GDP in 2001 may be understated by up to thirty percent compared with using a bias-corrected deflator. Our analysis of consumer durables, home production, and subjective well-being supports the conclusion that the decline in living standards has been substantially less than what is inferred by looking at official statistics on real output.

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  • John Gibson & Steven Stillman & Trinh Le, 2004. "CPI Bias and Real Living Standards in Russia During the Transition," Working Papers in Economics 04/02, University of Waikato.
    • Handle: RePEc:wai:econwp:04/02
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    More about this item

    Keywords

    CPI bias; living standards; measurement error; prices; Russia; transition;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • P36 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Consumer Economics; Health; Education and Training; Welfare, Income, Wealth, and Poverty

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