Abstract
ABSTRACT This paper presents a simple macro-econometric simultaneous equation model for the Russian economy. The consumption function is based on Friedman’s permanent income hypothesis. We assume that permanent income is estimated by households based on aggregate income dynamics using adaptive expectations. The paper compares two permanent income model specifications whereby either GDP or disposable income serves as the aggregate income variable. The specification based on the hypothesis where households consume a constant share of permanent GDP in constant consumer prices proved to be the best. The superior explanatory potential of this model when compared with alternative specifications supports the hypothesis that the behaviour of economic agents in the Russian economy considers Ricardian equivalence.
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