Publications Empirical Studies KYN - SLAMA: MACROECONOMIC CONSUMPTION FUNCTION FOR CZECHOSLOVAKIA
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Notice that the equation (31) can be thought of as a usual consumption function with nonconstant intercept, which is moving in the opposite direction to the transitory income. The estimated d then implies that for each 1% increase of transitory income - which also means a 1% increase in actual factor productivity above its trend value - the intercept of the consumption function moves down by .5 billion Kcs.

In other words, the aggregate consumption moves by .5 billion Kcs below the hypothetical value predicted by eq. (28), with a constant intercept. It should be stressed that this does not imply a decline in the absolute volume of consumption, because the positive transitory income means an absolute increase in the volume of national income, so that the downward movement of the intercept of the consumption function can be more than compensated for by the movement along the curve to the right. If the transitory income undergoes cyclical fluctuations, as has been the case in Czechoslovakia, then the model we have just presented would result in counter cyclical fluctuations of aggregate consumption. This is demonstrated on the hypothetical example in Diagram 5.

 Click below to display Diagram 5 in this window in a new window

In the years marked with + and + + the transitory income was positive and, therefore, the consumption curve was shifted down. On the other hand, in the years marked with - and - - the transitory income was negative, so that the consumption function curve was shifted upwards. At the right-hand side of the Diagram it is shown that the combination of negative transitory income with an absolute decline of national income can explain the peculiar S-type bend of the consumption line which appeared in Diagram 2.

To show that the fluctuations of actual consumption around the simple linear consumption function were really counter-cyclical, the variable F*t defined as

(32)

F*t = (Ct - Ct)/Ct

where

Ct

are fitted values of Ct from the function (28), is plotted against the relative transitory income Et in Diagram 6.

 Click below to display Diagram 6 in this window in a new window
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We shall try yet another, slightly different specification of the planners' consumption function. Our new assumption is that planners fix separately two components of aggregate consumption, namely the "permanent" consumption Ct and the "transitory" Ct* . The permanent component depends on "permanent" income Yt defined again as the fitted value of the production function, so that

(33)

Ct = a0 + a1 Yt + u t

The "transitory" component then depends on "transitory income" Yt - Yt so that

(34)

C*t = a*0 + a*1 (Yt - Yt ) + u* t

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Adding both components of the aggregate consumption and denoting ut = ut + u*t and a0 = a0 + a*0, we get the regression equation

(35)

Ct = a0 + a1 Yt + a*1 (Yt - Yt ) + u t

which is estimated in

Table 12.

The Planners' Consumption Function

with Separation of the Permanent and Transitory

"Marginal propensities."

Eq. (35)

 No. Method Estimated parameters(standard errors) ARC R2 DW SER F a0 a1 a*1 34 OLSQ 9.479(1.569) .521(.008) .311(.060) .326(.189) .995 1.30 2.92 2248.15 35 CORC 8.387(2.339) .526(.011) .317(.074) .326(.189) .995 1.90 2.74 2346.51

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Obviously the transitory propensity a*1 is much lower than the permanent propensity a1. The t-ratio test showed that they are different at the 1% level of significance.

The economic interpretation of these estimates is clear: planners tend to allocate for consumption 52 % of the permanent national income but only 31 0/o of the transitory national income. This means that whenever factor productivity increases above its trend value, actual income rises above its normal or permanent level and aggregate consumption increases, but less than proportionately to the increase of income. Whenever the growth-rate of factor productivity declines, the growth-rate of national income falls by more than that of consumption.

Statistical properties of the last estimates are very good, but they are slightly inferior to the estimates of the eq. (31). Especially, the stronger autocorrelation may indicate that the first specification was a little better. In fact, both specifications lead to similar conclusions about the planners' behavior so that they can be regarded as only alternative presentations of the same matter. Both seem to give a better insight into the process of the formation of aggregate consumption in Czechoslovakia than the distributed lag approach.

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The above theory accounts well for all the bends of the Czechoslovak consumption line except for the deviations in the years 1950, 1953, 1968, and 1969. This is even more clearly visible in Diagram 7, where the residual of the regression (35) from Table 12 is plotted.

 Click below to display Diagram 7 in this window in a new window

The remaining four large deviations from trend (1950, 1953, 1968, 1969) can be explained by special and mostly politically motivated causes. The high peak of 1950 was probably in part still an outcome of the post-war economic recovery but it was very likely also an aftermath of the communist takeover of 1948. The rapid increase of consumption was needed to get support or to minimize the resistance of the population during the time of the radical restructuring of the political and economic system of Czechoslovakia. In the following two years (1951 - 1952) consumption increased only marginally (by 2 billion Kcs) and then in 1953 it declined by the same amount, returning to the 1950 level. In the same period, however, national income increased by 25 billion Kcs, i. e. by almost 30%. This was unquestionably an outcome of the sudden increase of the investment ratio which was to speed up the rate of economic growth, but even more it was an outcome of the huge military build-up during the time of the Cold War. This process culminated in 1953 in the so-called "monetary reform" during which the rationing of consumer goods was abolished but people also lost most of their accumulated savings.

Finally the peak of 1968 - 69 was clearly an outcome of the Prague Spring and the subsequent Russian invasion. The Prague Spring brought political liberalization, which was accompanied by the revitalization of trade unions and revival of the right to strike, but it brought also a more consistent implementation of economic reform accompanied by a deliberate policy to curb the exorbitant growth of investment and to stimulate a faster growth of consumption. The Russian invasion could not stop these processes immediately, so that we can still observe the extra high level of consumption in 1969.

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D. Conclusions

The estimates presented in this paper demonstrate that it is meaningful to formulate 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. Although the "planners' consumption function" appears to be - at least for Czechoslovakia - basically linear in form, it differs from the traditional consumption functions in at least three respects:

(i)

it has a very high positive intercept - implying a declining average share of consumption in national income;

(ii)

its slope is relatively mild (slightly above .5) - implying that planners allocate for consumption only about one half of the increment of national income;

(iii)

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".

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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:

(i)

its intercept is small and it is not significantly different from zero, which implies an almost constant share of consumption expenditures in disposable income;

(ii)

its slope - marginal propensity to consume - is extremely high (about .96);

(iii)

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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It is possible that the consumer goods market was permanently in a state of suppressed inflation. In such a case the estimated consumers' consumption function does not properly represent consumers behavior; rather it reflects the fact that planners plan the supply of consumer goods in a fixed proportion to disposable income. But this would imply that people actually wanted to save even less than the observed 3 - 4 % of their disposable income.

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