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The Response of Consumption in Russian Households to Economic Shocks

  • Steven Stillman

This paper examines the extent to which consumption in Russian households responds to exogenous income shocks. During the time period studied in this paper (1994 - 1998), Russia experienced two major economic crises. Both featured extreme movements in the real ruble-dollar exchange rate. The price of oil, which is typically thought to have a strong effect on the Russian economy, was also quite volatile during this time period. This paper exploits these large changes in oil prices and exchange rates, as well as community-level variations in wage and pension arrears, to identify exogenous shocks to household income. Using representative panel data on urban households from the Russian Longitudinal Monitoring Survey, I find that a household which experiences an exogenous shock of 10% of its total income changes both its food and total non-durable expenditure by 7-11%. Most evidence indicates that these shocks are transitory in nature and thus the traditional Life Cycle/Permanent Income Hypothesis model is firmly rejected as describing the behavior of Russian households. Additional results indicate that changes in household savings are negatively related to exogenous income shocks, with this relationship strongest for low wealth households. Only models of consumption which include precautionary savings motives can explain why poorer households both reduce their consumption and increase their savings in response to an exogenous decline in income.

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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp412.pdf
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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 412.

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Length: pages
Date of creation: 01 Oct 2001
Date of revision:
Handle: RePEc:wdi:papers:2001-412
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  1. Robert E. Hall & Frederic S. Mishkin, 1980. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
  2. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 23-45, Summer.
  3. Martin Browning & M. Dolores Collado, 2001. "The Response of Expenditures to Anticipated Income Changes: Panel Data Estimates," American Economic Review, American Economic Association, vol. 91(3), pages 681-692, June.
  4. Hartmut Lehmann & Jonathan Wadsworth & Alessandro Acquisti, 1998. "Grime and punishment: job insecurity and wage arrears in the Russian Federation," LSE Research Online Documents on Economics 20251, London School of Economics and Political Science, LSE Library.
  5. Lehmann, Hartmut & Wadsworth, Jonathan & Acquisti, Alessandro, 1999. "Grime and Punishment: Insecurity and Wage Arrears in the Russian Federation," IZA Discussion Papers 65, Institute for the Study of Labor (IZA).
  6. Paxson, C.H., 1991. "Consumption And Income Seasonality In Thailand," Papers 150, Princeton, Woodrow Wilson School - Development Studies.
  7. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
  8. Alderman, Harold & Paxson, Christina H & DEC, 1992. "Do the poor insure? A synthesis of the literature on risk and consumption in developing countries," Policy Research Working Paper Series 1008, The World Bank.
  9. Bhalla, Surjit S, 1980. "The Measurement of Permanent Income and Its Application to Savings Behavior," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 722-44, August.
  10. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
  11. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  12. Shelly Lundberg & Robert A. Pollak, 1996. "Bargaining and Distribution in Marriage," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 139-158, Fall.
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