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Macroeconomic Consumption Functions for Czechoslovakia: A Planners' Permanent Income Hypothesis

  • Oldrich Kyn

    (Boston University)

  • Jiri Slama

    (Osteuropa Institut, Muenchen)

This paper presents estimates of the macroeconomic consumption function for a Soviet type economy. Systemic differences, however, require that two relations instead of the usual single behavioral relation be estimated. The first relation, which we call the 'planners' consumption function', models planners' decisions to allocate a certain portion of national income to consumption. Clearly such decisions are closely related to their investment decisions. The 'planners' consumption function' appears to be - at least for Czechoslovakia - basically linear in form, it has a very high positive intercept - implying a declining average share of consumption in national income; its slope is only slightly above .5 - implying that planners allocate for consumption only about one half of the increment of national income; the observed 'counter cyclical' fluctuations in consumption suggest that planners behave in a way similar to the permanent income hypothesis, namely that they determine aggregate consumption more on the basis of 'permanent income' than on the basis of 'transitory income'. The second behavioral relation, which we call the 'consumers' consumption function', models the aggregate effect of the millions of independent decisions of individual consumers to divide their disposable income between consumption expenditures and savings. This function is conceptually closer to the macroeconomic consumption functions for Western market economies. The empirical estimates for Czechoslovakia showed the 'consumers' consumption function' to be again linear in form but different from the Western-type consumption function as well as from the 'planners' consumption function' in the following respects: its intercept is small and it is not significantly different from zero, which implies an almost constant share of consumption expenditures in disposable income; its slope - marginal propensity to consume - is extremely high (about .96); no time lags in consumer behavior could have been detected, which implies either very myopic consumers or the almost total absence of transitory incomes in the Czechoslovak economy.

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Paper provided by EconWPA in its series Macroeconomics with number 0510006.

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Date of creation: 05 Oct 2005
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Handle: RePEc:wpa:wuwpma:0510006
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