Empirical analysis of the permanent income hypothesis based on the Post-Soviet Russian data

Abstract

The paper tests the hypothesis of permanent income on modern (2007– 2019) data of aggregated income indicators and expenditure of the Russian households. To test the hypothesis, we use John Shea’s methodology. According to his approach, the values of the predicted indicators of the current change in income and interest rates are determined using several sets of variables. The empirical analysis carried out by these authors shows that the behavior of households in Russia does not follow Milton Friedman’s permanent income hypothesis, but is consistent with Christopher Carroll’s “buffer stock” model. Fluctuations in income have a statistically significant effect on fluctuations in consumption. This means that Russian consumers are not inclined to smooth future consumption over the entire life cycle, but tend to maintain a certain level of savings for several periods in advance as a safety net in the event of a fall in permanent income. This conclusion is logical for the post-Soviet Russian space. As the studies show, in developing countries and with less developed financial institutions and markets, individuals have difficulties in planning their behavior. They face a narrow planning horizon with a high degree of uncertainty about the future.