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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