Non-Keynesian Savings of Russians

Abstract

The Russian recession of 2014-2015 began with a run on the ruble and a rise in the rate of inflation, the precise opposite of a Western-type deflationary slump combined with money hoarding. Does this mean that Russians need different micro-model to describe savings and consumption behavior? This study shows that the workhorse log-linearized rational SDF formula with the CRRA utility function still provides a good explanation for the behavior of Russian consumers. It explains dollarization, domestic equity market avoidance, preference for real estate, and, most importantly, a wary attitude towards the ruble. Expectations derived from past and interactive preferences lock the Russian economy in a state of steadfast distrust in the ruble as prone to inflation. At present, one should not expect a Keynesian-type deflationary cycle in Russia. The next recession is likely to be inflationary, requiring monetary tightening. This reasoning is generalized for other emerging countries. A free-floating currency and inflation targeting do not ensure an easy path for countries with recent experiences of high inflation.