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Econometric Analysis of Permanent Income Hypothesis on the Data of the Post-Soviet Russia

Student: Svyatoslav Churbanov

Supervisor: Ivan V. Rozmainsky

Faculty: St.Petersburg School of Economics and Management

Educational Programme: Economics (Bachelor)

Year of Graduation: 2020

The present research is aimed to reveal the specifics of the household consumption in Russia and its dependence on the size of household’s income. Particularly, it covers the connection between temporal changes of consumption and the predicted changes of permanent income. During the last twenty years the dynamics of the Russian GDP growth have been changing drastically due to the World Financial Crisis of 2008 and the annexation of Crimea of 2014. So in order to maintain stable economical growth it is necessary to develop effective policy of stimulating healthy consumer expenditure, which allocates half of Russian GDP. Most existing papers on this subject used only the microdata and did not assume strong constraints of liquidity and the expectations of the income decline. This research analyzes the aggregated quarterly data of Russian households during 2007 - 2019 years and tries to explain the main consumption trends with the Permanent Income Hypothesis (PIH) of Milton Friedman. An empirical analysis shows that the household behavior in Russia does not follow the Permanent Income Hypothesis, but is a sort of proof of Christopher Carroll’s “buffer stock” model. It means that Russian consumers are more inclined not to smooth out future consumption over the entire life cycle, but rather to maintain a certain level of savings for several periods ahead, as a safety net in case of a sharp fall in permanent income. This conclusion is logical for the post-Soviet Russian space. In developing countries and with less developed financial institutions (in particular, the capital market), the individual experiences difficulties in planning his behavior. The planning horizon is shrinking and households are calculating their consumption for the shorter term. However, this behavior cannot be called irrational / short-sighted, since it is not the individual's mistake, but an inability to make a longer-term forecast. The results can be useful for the development of fiscal and monetary policies by the state and banks, since the specification of the model includes the effect of obtaining loans and the effect of deviations in the interest rate. If these variables are statistically significant, then banks will be able to develop a more commercially successful or more customer-oriented business models, and the state will be able to make a more accurate forecast of macroeconomic indicators. Key words: permanent income, Permanent Income Hypothesis, consumer behavior.

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