Publications   Empirical StudiesKYN - SLAMA: MACROECONOMIC CONSUMPTION FUNCTION FOR CZECHOSLOVAKIA
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B. The Consumers' Consumption Function

Empirical estimates in this part largely duplicate the work K. Janacek (1972, 1975). We have obtained very similar results and we also tend to give them a similar interpretation, although with a much greater dose of caution.

Janacek estimated only the demand equation (22) and without a hesitation believed that it truly represented consumer behavior. If he were right, then his justification of his work would be quite appropriate:
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"Decision-making about the allocation of . . . income between consumption and saving takes place outside the area of central decision-making. Its behavioral character . . is obvious. The center can at most influence the level of disposable money income using indirect tools of regulation; on the other hand it is difficult to influence decisions about the use of disposable income . . . For central planning it is necessary to have precise information about behaviorally determined magnitudes to make them compatible with planned magnitudes . . . and to chose instruments of economic policy."7

Of course, Janacek is aware of the fact that the behavioral interpretation of the consumers' consumption function depends crucially on the existence of equilibrium between supply and demand on the consumer goods market. To justify his approach he claims that "there is general agreement among economists that the consumer market is in global equilibrium".8 This claim is quite controversial; many economist, have expressed their strong belief that the consumer goods market in Soviet type economies is in an almost permanent state of suppressed inflation9 and even Janacek himself writes that "at a certain period the practice of planning the saving ratio at an arbitrary level . . . prevailed... The discrepancy between the arbitrarily planned and actual savings gave rise to discussions about so-called nonrealized purchasing power . ."10 This can only mean that the consumer goods market was not in "global" equilibrium.
On the other hand R. Portes comes to conclusions11 rather similar to Janacek's position, namely that his econometric results provide preliminary evidence, that "is broadly consistent with the view that the CPEs have maintained an acceptable degree of macroeconomic equilibrium since the mid-1950s."
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 Whether this is true or not, we shall proceed to estimate the consumers' consumption function as if the equilibrium existed. The reader must, however, bear in mind that we do not mean to maintain that it was actually so. .
We only want to show what the estimated consumption function would tell us about the behavior of Czechoslovak consumers if the assumption regarding equilibrium were true.12 Later we shall also argue that these estimates do tell us something about consumer behavior even if the assumption regarding macroeconomic equilibrium were false
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Click below to display Diagram 1
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Diagram 1, which plots consumption against disposable income, suggests that the most simple linear consumption function with the intercept close to zero and the slope close to one will very probably explain the aggregate behavior of Czechoslovak consumers quite well. Our first step, therefore, will be to estimate the consumption function (24) using annual and also quarterly data.

(24)

CtD  =  a0 + a1YtD + ut

Click below to display Table 1
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It can be seen from Table 1 that the simple linear function (24) gives an extremely good fit for both annual and quarterly data. All four regressions gave very similar results. Considering that the aggregate volume of consumption was 78 billion Kcs in 1954 and 186 billion Kcs in 1969, the estimated intercepts a0 are very close to zero. They are also statistically insignificant, except for the case with seasonal dummies, where the statistical significance results from the differences in seasonal fluctuations of consumption expenditure and those of disposable income.
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All four regressions show the marginal propensity to consume a1 to be around .95, which is very high indeed. The close-to-zero positive intercept implies that the average propensity to consume must have been almost constant and only slightly greater than the marginal propensity.13 
It is also interesting that the regression on annual data, as well as the regression on quarterly seasonally adjusted data, show a total absence of auto-correlation.
In spite of the good fit by equation (24) we are tempted to try some more complicated specification. Naturally, our next step should be to test whether the estimated consumption function would reveal that the Czechoslovak consumers have behaved according to the permanent income or life cycle hypotheses. 
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 Because of the lack of other data we shall test this proposition by only estimating the consumers' consumption function with a distributed lag. We begin with the familiar Koyck transformation of the geometrically distributed lag:
(25)

CtD  =  a0 + a*1YtD + l Ct-1D + ut

Click below to display Table 2
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The results of Table 2 show very little improvement over Table 1.  The estimates of the coefficient l are very small and mostly insignificant. The mean lag implied by these estimates is extremely short. The long-run MPCs calculated from the parameters of (25) are only slightly greater than the MPCs in Table 1.

Table 3

Long-Run MPCs and Mean Lags 

for Regressions of Table 2

No. of Regression L. R. MPC* Mean Lag In Months
5. .962 1.00
6. .962 .30
7. .957 .21
8. .979 2.20

*The long-run MPCS were calculated using the average annual rate of growth of consumption, 5.93%, or the quarterly rate of growth, 1.45 %.

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The least squares estimates of the Koyck transformation are known to be inconsistent and may lead to biased estimates of the mean lag. It would, therefore, be safer to try in addition some other form of distributed lag, e.g. Almon's polynomially distributed lag (26):
(26a)

Ct =  a0 +  Ss=0d bs Yt-s + ut

(26b)

bs =  Sr=0r  gr sr 

dis the length of of period over which the lag is distributed
ris the degree of the polynomial.
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Sometimes the lag function is forced through the origin at the (d + 1) period by adding the zero restriction:
(27)

bd + 1 = 0

Click below to display Table 4
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The estimates reported in Table 4 support the previous findings. The intercepts a0 are close to zero and insignificant. The long-run MPCs are between .961 and .957 (see Table 5). The estimated bs for s > 0 indicate that past income had a very small and quickly vanishing effect on current consumption. The estimated mean lag was again extremely short — two months or less.
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Table 5

Long-Run MPCs

No. of 
Regression   		Long-Run
MPC
9 .964
10 .969
11 .961
12.961
13 .966
14 .967
We can conclude that the variants of the consumers’ consumption function estimated here suggest a somewhat peculiar behavior pattern on the part of Czechoslovak consumers; they spend an extremely high —according to western standards — portion of their disposable income, and they adjust their consumption expenditures almost simultaneously with changes in income.

To explain this peculiarity three different hypotheses can be put forward:

(1) Czechoslovak consumers are very myopic; they do not care about the future and spend practically all their transitory income immediately.

(2) The peculiarity is not in the people, but in the economic system, which has practically eliminated all transitory income, and for most people has made their current income identical with permanent income.

(3) Because of the state of permanent suppressed inflation the estimated equations say nothing about consumer behavior; rather they show that planners always plan disposable income and the supply of consumer goods in a constant proportion.

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The first hypothesis does not seem very plausible. The second can be supported by the following facts:

(a) The communist regime abolished practically all private business, and consequently also profits and other forms of "unearned income", which usually fluctuate more than wages and salaries.

(b) Forced industrialization in the 1950s eliminated unemployment, and at the same time an extensive system of social security — including free health care, sickness and dissablity payments, child allowances, pensions, etc. — was created. Practically every Czechoslovak citizen has a guaranteed income for the whole span of his life.

(c) The distribution of income has been under the very strict control of the government, and as a result wages and salaries have grown at a very slow but rather steady rate. This holds for national aggregates as well as for individual incomes.

(d) A government wage policy based on the principle "equal pay for equal work" resulted in a very slow progression of incomes with age. Frequently, the 20 year old worker earned as much or more than the 40 or 50 year old, if both worked on the same type of job.

(e) Finally, government incomes policy has led to a considerable equalization of income among different professions and groups of the population. As a result the average Czechoslovak citizen can expect only a marginal change in his income if he changes his job or is promoted.

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The third hypothesis about suppressed inflation may also be correct. The above estimates may simply mean that in preparing the balance sheet of money incomes and expenditures of the population, planners fix the saving ratio at 4 percent.
Notice, ‘however, that this does not exclude the validity of the second hypothesis. For the consumer goods market to be in a state of suppressed inflation consumers must plan to save even less than that, and this can happen only because the economic and social system puts the typical Czechoslovak consumer in a quite different situation from the one in which a Western consumer finds himself. The Czechoslovak consumer expects very little change in his current income. He knows that he cannot get any windfall profits or capital gains except from the lottery; he knows that he cannot expect much improvement from promotion or from a change of job; but he also knows that he cannot lose much, because (1) when he is sick his wage or salary does not decrease appreciably, (2) if he is fired (which is very unlikely for other than political reasons), he can easily find another job. The typical Czechoslovak consumer simply does not need saving to hedge against variations in income and the uncertainties of life. He also has very little use for savings because of the meager investment oportunities available.

 

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