Excess demand, repressed inflation, andforced saving in the Soviet Union

Nick van der LijnNetherlands Economic Institute

and

Marno VerbeekK.U.Leuven and Tilburg University

Center for Economic Studies

Naamsestraat 69

B-3000 Leuven

Belgium

Marno.Verbeek@econ.kuleuven.ac.be

July 1997

Keywords: soviet union, disequilibrium, consumption, forced savingsJEL-codes: E21, P20, C34

AbstractThe macroeconomic situation on the Soviet consumer goods market, incertain periods between 1965 and 1991, is likely to be characterized byrepressed inflation and thus forced savings. These forced savingsadded to the monetary overhang to further increase demand forconsumer goods in later periods. In this paper we specify adisequilibrium model for the Soviet economy allowing for the presenceof monetary overhang affecting consumer demand. Estimates arepresented of repressed inflation, excess demand and monetaryoverhang based on this model, estimated over the period 1965-1990.The results support our view that monetary overhang was importantand had a positive impact on the demand for consumer goods.

2

1. Introduction

It is generally accepted that the macroeconomic situation on the Sovietconsumer goods market worsened considerably in the second half ofthe 1980s. Official plus hidden price rises were insufficient to curb thegrowing demand from Soviet households. This led to forced savingwhich added to the monetary overhang to further increase demand forconsumer goods in later periods. A recent estimate of the volume of themonetary overhang at the end of 1990 is given in Cottarelli and Blejer(1992), who estimated a consumption function based on Modigliani'sversion of the life-cycle model for 1964 until the mid-1980s, and thencalculated the sum of actual minus projected saving up to 1990.

Less agreement exists concerning the situation on the Sovietconsumer goods market in the 1970s. Whereas Birman (1980a) arguedthat a deep financial crisis was developing in the Soviet Union,Pickersgill (1980a) and Farrell (1989) stated that no evidence for thiscould be found. Birman based his argument on the observed rising ratioof household monetary assets to household annual money incomes orto household annual monetary expenditures (the ratio referred to inBirman and Clarke 1985). According to his estimates this ratio (whichhe called ALB) had reached the value of 0.66 in 1976, which was in hisview abnormally high (Birman 1980b). A normal level of ALB seemedto him 0.3 at most.1

1 Pindak (1983) and Winiecki (1985) also made use of this type of indicator

to support their view that STEs experienced chronic repressed inflation. We

agree, however, with those who have questioned the validity of ALB as an

indicator of macroeconomic disequilibrium (see, for example, Portes 1989 and

Cottarelli and Blejer 1992). The main critique is that in the Soviet Union

money was primarily a store of wealth and that there are several factors that

could explain a voluntary increase in the aggregate wealth-to-income ratio. If

consumers would like to save a fixed proportion s of their disposable income,

ALB would also be rising: suppose that there is a stable growth rate g of

nominal disposable income, then ALB would be converging to s(1+g)/g (note

that a deceleration in nominal income growth leads, ceterus paribus, to an

3

The argument of Pickersgill was based on examining the'normality' of Soviet household saving behaviour analyzingdevelopments in the average and marginal propensity to save and byestimating several (Western) saving functions. On the basis of data for1955-1971 she concluded that the results "do not support the view thatSoviet households are saving larger and larger proportions of theirincreased income" (Pickersgill 1976, p.146). For 1955-1977 she observedgrowing saving rates at the end of the period, which could be due tochanges in saving behaviour (and thus be voluntary), but moreprobably "although the evidence cannot be conclusive, the growth ofrepressed inflation may be at least partially responsible for theincreased saving rates" (Pickersgill 1980b, p.633).2 Farrell (1989) basedhis conclusion on the observation that, given the level of economicdevelopment, ALB in the Soviet Union did not significantly differ fromthis ratio in a number of other Soviet-type ecomomies.

As pointed out by Richard Portes in various articles (see, forexample, Portes and Winter 1980, Portes 1989), a theoretically soundapproach for examining the macroeconomic situation on the consumergoods market in Soviet-type economies is to allow for both excessdemand and excess supply in the maintained hypothesis. For a longtime, data limitations, especially concerning household cash holdings,prohibited the estimation of a Portes'-type disequilibrium model for theSoviet Union. From the early 1990s, however, sufficiently reliable dataare available for the Soviet economy.

The aim of this paper is to contribute to the debate concerning themacroeconomic situation on the Soviet consumer goods market bypresenting estimates of repressed inflation, excess demand, andmonetary overhang for 1965-1991. Both the 'standard' disequilibriummodel and a modified version of this model is estimated. The lattermodel extends the Portes' model with the aim to capture the potentialeffect of the monetary overhang on consumer demand. It seems logical

increase in ALB).

2 It should be noted that savings in cash were not included in the data set

used by Pickersgill as official figures for household cash holdings were not

available at that time.

4

that consumers would like to spend (part of) their involuntary moneyholdings if they would have the chance to do so. In fact, the commonunderstanding of the meaning of 'monetary overhang' clearly supportsthis idea: if consumers would not like to consume out of theirinvoluntary money holdings, why bother about a monetary overhang atall? The inclusion of the monetary overhang in a disequilibrium modelcorresponds with the notion that excess demand and repressedinflation are not the same (Nuti 1986).

The structure of this paper is as follows. In section 2 we develop adisequilibrium model, which includes the possibility that monetaryoverhang increases consumer demand and provides a framework fordetermining the concepts of excess demand, repressed inflation, forcedsaving, and monetary overhang.3 Section 3 describes the data used andcontains the estimation results obtained for both the standard and theextended model and using four different specifications for theconsumer demand function. Section 4 interprets the results in moredetail and presents estimates of probabilities of excess demand, as wellas estimated percentages of repressed inflation and excess demand for1965-1991. Moreover, estimates of the monetary overhang are given for1965-1990, while the estimates for end-1990 are compared with resultsobtained by Cottarelli and Blejer (1992) and Van der Lijn (1994). Someconcluding remarks are made in section 5.

2. A disequilibrium model with monetary overhang

The standard disequilibrium model consists of a demand and supply

3 The definitions and framework for analysis presented in section 2 have

earlier been proposed in Van der Lijn (1994). In that paper a simple model

based on this framework was subsequently developed and estimated. Only

the demand side of the consumer goods market was included in the model

and consequently much more restrictive assumptions were needed to obtain

estimates for excess demand, repressed inflation, forced saving, and monetary

overhang than for obtaining these estimates within the disequilibrium

approach taken in this paper.

5

equation and a rule which describes how actual consumption isdetermined. Usually, both the demand and supply equation contain anunobserved error term and actual consumption is defined as theminimum of demand and supply. If excess demand induces forcedsaving, accumulated in monetary overhang, this may further increasedemand in later periods. To model this, we assume the existence ofequilibrium consumption, denoted CDtEQ, describing desiredconsumption of households when rationing is (and has been) absent.When there is no monetary overhang at the end of year t-1 (MOt-1 = 0),this function describes desired consumption in year t. The complementSDtEQ (household disposable income minus CDtEQ) is desired saving inthe absence of rationing. If there is positive monetary overhang, anincrease of desired consumption may take place. We refer to theresulting demand as disequilibrium consumption, denoted CDtDE. Let usassume that the relation between equilibrium consumption and othereconomic characteristics, collected in x1t, can be described by

CDtEQ = x′1tβ1, (1)

where β1 is a vector of unknown parameters. Disequilibriumconsumption is then described by

CDtDE = x′1tβ1 + αMOt-1, (2)

where it can be expected that α > 0. Unless households have noinvoluntary money holdings (MOt-1 = 0), disequilibrium consumptionin year t exceeds equilibrium consumption.

Excess demand in year t is defined as disequilibrium consumptionminus actual or observed consumption Ct, where actual consumption isassumed to be the minimum of disequilibrium consumption andsupply, denoted CSt, plus a random error term ut. That is,

Ct = min {CDtDE, CSt} + ut. (3)

Finally, supply is described by

CSt = x′2tβ2 + u2t, (4)

6

where x2t denotes a vector of macro-economic characteristics.Combining (3) with (2) and (4), shows that (3) can be rewritten as

Ct = min {x′1tβ1 + αMOt-1 + e1t, x′2tβ2 + e2t} (5)

with e1t = ut and e2t = u2t + ut. This shows that, statistically, our modelcorresponds to the standard disequilibrium model, as employed in, forexample, Portes and Winter (1980) and Van der Lijn (1990) and,moreover, reduces to it if α = 0.

Monetary overhang MOt is determined endogenously in themodel as the cumulative of past forced savings. Forced saving FSt is thedifference between observed saving St and voluntary saving SDtEQ, asdescribed by the model, and can also be written as

FSt = CDtEQ - Ct. (6)

Given estimates for the unknown parameter vector β1, the definition in(6) makes forced saving observable; in particular, it does not depend onrandom error terms. Also note that forced saving is not restricted to benonnegative (see below).

Monetary overhang, the cumulative of forced savings, is definedrecursively as

MOt-1 = max { (MOt-2 + FSt-1)/(1 + pt), 0}, (7)

where pt is the inflation rate in year t. Thus, the value of monetaryoverhang, at the end of period t-1, equals monetary overhang at the endof the previous period plus forced saving, discounted by the inflationrate.4 If this leads to a negative outcome, monetary overhang is set tozero. It will be assumed that monetary overhang before the beginning

4 This definition of monetary overhang corresponds with the definition

used by Cottarelli and Blejer (1992). The same applies for the notion that

forced saving should be understood as the deviation of observed saving from

desired saving along the equilibrium path.

7

of our sample, in 1965, equals zero, i.e. MO0 = 0. The fact that forcedsaving depends upon observable variables and the model parametersalso implies that monetary overhang is observable once the modelparameters are known. This is very important in the estimation stage.Finally, we define repressed inflation as the change in monetary overhang(St - SDtEQ or CDtEQ - Ct) as a fraction of observed consumption Ct. Recallthat excess demand equals CDtDE - Ct as a fraction of Ct.

Within the above model, regimes of excess demand and excesssupply can be further refined depending on the change in monetaryoverhang. Note, for example, that excess demand may coexist with areduction of the monetary overhang (that is, with 'negative forcedsaving' and negative repressed inflation), namely when CDtEQ < Ct ≤CDtDE. Table 1 shows all possible combinations and their implications.

8

TABLE 1 Excess demand, repressed inflation, forced saving, and monetaryoverhang

I. Excess Demand: CDt > CSt = Ct

A. MOt-1 = 0, CDt = CDtEQ B. MOt-1 > 0, CDt = CDtDE

excess demand + forced saving (RI):

B1.excess demand +forced saving (RI):

Ct < CDtEQ

St > SDtEQ

MOt > MOt-1 = 0

Ct < CDtEQ < CDtDE

St > SDtEQ

MOt > MOt-1 > 0

B2.excess demand + no changein monetary overhang:

Ct = CDtEQ < CDtDE

St = SDtEQ

0 < MOt = MOt-1

B3.excess demand + reductionof monetary overhang:

CDtEQ < Ct < CDtDE

St < SDtEQ

0 < MOt < MOt-1

II. Excess Supply: Ct = CDt < CSt

C. MOt-1 = 0, CDt = CDtEQ D. MOt-1 > 0, CDt = CDtDE

no excess demand + only voluntary saving

no excess demand + reduction ofmonetary overhang

Ct = CDtEQ

St = SDtEQ

MOt = MOt-1 = 0

CDtEQ < Ct = CDtDE

St < SDtEQ

0 ≤ MOt < MOt-1

Note. RI is repressed inflation, which is positive in case A and case B1, zero incases B2 and C, and negative in cases B3 and D.

9

3. Data and estimation results

All estimates below are obtained from annual data for the Soviet Union.Considering that it is implicitly assumed that the aggregate behaviourof economic agents is stable over the entire sample period for which themodel is estimated, it was decided to take the first full year of Brezhnevrule (1965) as the first year of the estimation period and 1990 as the lastyear, rather than 1991, which in many ways can be regarded as a specialyear. Estimates for 1991, however, will be presented based on theparameter estimates obtained for 1965-1990. All variables are in billionsof rubles in constant (1983) prices. As the official CPI is assumed tounderestimate the actual price rises of consumer goods and services, analternative CPI was used to deflate the household disposable income,monetary assets, and consumption series. For constructing the GNPdata, use was made of estimates of growth of real GNP by the CIA andMarer (1992). See the appendix for more detailed information on thedata and on the construction of the variables.

As soon as the joint distribution of the unobserved error terms isspecificied, the extended disequilibrium model can be estimated by themaximum likelihood method. In this paper, we shall make the commonassumption that the error terms e1t and e2t are uncorrelated bivariatenormal with variances σ12 and σ22, respectively. It should be noted thatunder these assumptions ut and u2t are correlated normal variables,with covariance -σ12 and variances σ12 and σ12+σ22, respectively.Starting from the assumption that ut and u2t are uncorrelated, it wouldbe incorrect to assume that e1t and e2t are uncorrelated as well. As themaximum likelihood estimator looses consistency if the zero correlationis incorrectly imposed, we shall, for all specifications of the model, testthe hypothesis that e1t and e2t are independent.

The likelihood function for the model consisting of equations (2)-(4) and (1), (6) and (7), which we shall refer to as model II, equals that ofthe standard disequilibrium model, as given in, for example, Maddalaand Nelson (1974) and Quandt (1988), where one of the explanatoryvariables is replaced by an expression in terms of lagged endogenousvariables and unknown parameters (viz. the solution of (7) in terms of(1) and (6) with MO0 = 0). The standard disequilibrium model, model I,arises if α=0 is imposed a priori.

10

Before the models can actually be estimated, it has to be decidedwhich variables to include in x1 and which to include in x2. In x2 aconstant, the trend of the supply of consumer goods and services (CT),the deviation from the trend of GNP in the current and in the previousyear (GX, GX-1), and the deviation from the trend of monetary assetsheld by the households at the end of the previous year (MX-1) wereincluded. Several specifications for the consumer demand functionwere used: one which contains (smoothed) disposable income andwealth (model I.a and model II.a), a distributed lag model (I.b, II.b), apermanent income model (I.c, II.c), and one based on the Houthakker-Taylor savings function (I.d, II.d). Hence:

a. x1 = {constant, YDS, M-1},b. x1 = {constant, YD, YD-1, YD-2},c. x1 = {constant, YDP, YDT},d. x1 = {constant, S-1, DYD, YD-1}, while

x2 = {constant, CT, GX, GX-1, MX-1},

where YD is household disposable income, DYD is the change indisposable income from the previous to the current year, YDS issmoothed disposable income, YDP is permanent income, YDT istransitory income, M is monetary assets held by households at the endof the year, and S is household saving.5

Note that for specification a, α=0 would imply that desiredconsumption out of voluntary wealth is equal to desired consumptionout of involuntary wealth. This would support the hypothesis thatSoviet consumers were forward looking in their consumptionbehaviour and did not consider the part of their bank accounts or cashholdings due to past forced saving to be different from that part whichwas the result of past voluntary saving. In specification d, S-1 isexpected to capture the effect of habit formation: high savings in year t-1 are expected to positively influence the amount of savings in year t.

5 It seems reasonable to use M as a proxy for (non-human) wealth as

monetary assets constituted the main store of wealth for Soviet households.

11

Hence, when α=0 and consumers actually are forced to save more thanthey intended (S > SDEQ) the hypothesis is that the habit formationeffect of past forced saving is equal to the habit formation effect of pastvoluntary saving.6 The underlying hypothesis of model II.d is that thishabit formation effect might be different. As FSt-1 is part of MOt-1 (seeequation (7)), this difference is equal to α/(1+pt).

Both the standard model (models I.a-d) and the extended model(models II.a-d) were estimated using MAXLIK version 4.0.7 in GAUSSversion 386i 3.2. Before estimation all variables were scaled by dividingthrough 100, except those in deviations from their trend. Severalstarting values were used to start the iterations, as the maximizationprocedure was hampered by convergence problems and local maxima.As the model looses a sensible economic interpretation if the effect ofmonetary overhang on demand is negative, we restricted the sign of αin estimation. For obtaining convergence it proved to be necessary toset the coefficient for CT equal to one. For model II.b, YD-2 (whichproved to be insignificant in model I.b*) was removed as anexplanatory variable before convergence was attained. Model II.d failedto converge. Convergence was reached, however, when the coefficientof YD-1 was fixed at the (unconstrained) estimate from model I.d.7

Ultimately, the results reported in Table 2a and Table 2b were obtained(the estimates given in Tables 2a-b are adjusted for scaling, i.e., theycorrespond with the ordinary, unscaled variables).

The most interesting result is that the endogenously determined

6 This hypothesis corresponds with what Burkett (1988) called the

'discouraged consumer effect'. As the influence of past saving on consumer

demand is assumed to be negative, allowing for the discouraged consumer

effect would lead to estimates of (potential) excess demand which would be

higher than the estimates of excess demand resulting from model I.d.

7 Model II.d was also estimated with the coefficient for YD-1 fixed at several

other values. For those values for which convergence was reached, the

estimated probabilities of excess demand as well as the estimated percentages

of repressed inflation and excess demand were almost the same. The log-

likelihood proved to be lower in these cases.

12

monetary overhang is shown to have a significant positive effect ondesired consumption for all four specifications for the demandfunction. If they would have had the opportunity to purchaseadditional goods and services at state prices, Soviet consumers wouldhave consumed a considerable proportion of their involuntary moneyholdings. The estimates of the supply function are conform a prioriexpectations. The supply of consumer goods and services appears tosome extent to be dependent (with some lag) on variations in GNP (thesum of the coefficients for GX and GX-1 is positive), while the plannersseem to be responsive to observed deviations of household monetaryassets from their trend values, although it should be mentioned that thet-values are fairly low. Moreover, the estimates of the supply functionprove to be not very dependent on either the type of model selected orthe specification of the consumption function. When interpreting theestimation results for these models and specifications, in the nextsection, we shall not choose one as our preferred specification, butshow the results for all specifications and argue that these are, mostly,qualitatively the same.

To test the hypothesis that the correlation coefficient, ρ, betweenthe two unobserved error terms e1t and e2t equals zero, we performedLagrange Multiplier tests for the hypothesis ρ=0 for each of thespecifications. This test essentially tests whether the first derivativewith respect to ρ of the loglikelihood function in the unrestricted modelis significantly different from zero if evaluated at the estimates from therestricted model. Estimation of the unrestricted model is thus notrequired. The asymptotic distribution of the test statistics under the nullhypothesis that ρ=0 is χ2 with one degree of freedom. From the teststatistics, reported in the rows rho=0 in Tables 2a-b, we infer that thenull hypothesis cannot be rejected for models Ia-d. For models II.b andII.c the null hypothesis cannot be rejected either, although the teststatistic for models II.a and II.d indicate that it is incorrect to assumethat the covariance between e1t and e2t is zero. However, as the mainresults discussed below are not dependent upon the choice of thespecification for the demand function this is less troublesome than itmay seem.8

8 An alternative and preferable procedure is to estimate the models

13

TABLE 2a Disequilibrium estimates for the Soviet Union, 1965-1990,specifications a and b

I.a II.a I.b* I.b II.b

constant 2.23(0.37)

-0.43(0.07)

9.77(8.87)

9.21(9.51)

8.69(13.4)

YDS 0.93(22.3)

0.96(22.1)

- - -

M-1 0.05(1.26)

-0.01(0.21)

- - -

YD - - 0.44(10.5)

0.42(11.6)

0.52(17.2)

YD-1 - - 0.45(5.65)

0.52(15.1)

0.42(13.7)

YD-2 - - 0.05(1.03)

- -

MO-1 - 0.38(6.22)

- - 0.11(4.96)

constant 1.15(1.10)

1.42(1.33)

2.06(1.58)

1.86(1.51)

1.17(1.17)

CT 1 1 1 1 1

GX -0.47(2.28)

-0.50(2.41)

-0.46(1.96)

-0.43(1.94)

-0.41(2.01)

GX-1 0.59(2.17)

0.67(2.42)

0.67(1.98)

0.71(2.26)

0.68(2.38)

MX-1 0.40(2.02)

0.30(1.59)

0.25(0.99)

0.20(0.89)

0.29(1.49)

s1 0.74(2.04)

0.74(3.21)

0.47(4.23)

0.46(3.71)

0.22(3.79)

s2 4.28(5.85)

4.48(5.54)

5.09(4.92)

4.94(5.03)

4.58(5.76)

allowing for non-zero covariance between e1t and e2t. However, all models

failed to converge when it was tried to estimate the (unrestricted) covariance

jointly with the other parameters.

14

L 57.85 59.09 65.00 64.50 65.40

rho=0 0.80 7.41 0.01 1.33 0.14

Note. Absolute t-values in parentheses. L is the value of the log-likelihoodfunction evaluated at the maximum. rho=0 tests whether the hypothesis thate1t and e2t are uncorrelated should be rejected (the critical value at the 5% levelis 3.84).

15

TABLE 2b Disequilibrium estimates for the Soviet Union, 1965-1990,specifications c and d

I.c II.c I.d II.d

constant 15.63(26.0)

5.91(4.32)

9.26(7.12)

6.50(54.4)

S-1 - - -0.22(2.61)

-0.15(26.3)

DYD - - 0.42(8.11)

0.58(71.2)

YD-1 - - 0.95 (173)

0.95

YDP 0.93 (632)

0.94 (389)

- -

YDT 0.15(7.44)

0.68(10.2)

- -

MO-1 - 0.48(15.9)

- 0.12(25.5)

constant 1.09(1.03)

2.15(1.65)

2.80(1.90)

0.89(0.96)

CT 1 1 1 1

GX -0.49(2.23)

-0.50(2.08)

-0.60(2.31)

-0.42(2.21)

GX-1 0.70(2.19)

0.63(1.96)

0.55(1.48)

0.64(2.44)

MX-1 0.36(1.61)

0.25(1.10)

0.47(1.61)

0.35(1.93)

s1 0.21(4.04)

0.48(4.23)

0.62(4.63)

0.03(3.68)

s2 4.86(5.62)

5.09(4.93)

5.16(4.43)

4.34(6.12)

L 64.04 65.12 66.44 74.31

rho=0 3.53 0.01 0.07 9.27

Note. See Table 2a.

16

4. Implications and discussion

For all eight models, Table 3 shows the unconditional probabilities thatdemand exceeds supply, P(CDtDE>CSt). However, ex post, when actualconsumption is observed, we can also use this information incomputing probabilities of excess demand (see Burkett 1981), whichleads to the conditional probabilities (P[CDtDE>CSt Ct]) presented inTable 4. The difference between the unconditional and conditionalprobabilities of excess demand mainly reflect the fact that the estimatesfor s1 are much lower than the estimates for s2. In Table 5 the estimatesof percentages of repressed inflation and excess demand based onmodels II.a-d are given. Results for 1991 based on projected demandand supply, and on actual consumption are reported as well. As can beseen in Tables 3-5, the conditional probabilities of excess demand arerelatively high for years where CDtDE>Ct, irrespective of the estimatedlevel of consumer goods supply (this especially holds true for modelsI.c, II.b, and II.d, for which the estimate for s1 is relatively low).

Examining the results presented in Tables 3-5 the followingobservations can be made. First, there was more or less macroeconomicequilibrium on the Soviet consumer goods market from 1965-1972,whereas increasing tensions can be observed from 1973-1979. Especially1976-1978 seems to be a period of excess demand. 1980/81-1984 is aperiod of negative repressed inflation combined with the absence ofexcess demand.9 Tensions are increasingly appearing again in the

9 The improved macroeconomic situation on the consumer goods market in

the early 1980s as compared to the late 1970s might seem surprising

considering the slow-down of Soviet economic growth in 1979-1981. One of

the explanations appears to be the price policies of the Soviet leadership.

Average annual inflation was 1.9% in 1975-1978 and 3.0% in 1980-1983.

(According to official figures, average annual inflation was 0.2% in the first

period and 1.6% in the latter period.) As a result, a slow-down of the growth

of real household disposable income can be observed in 1980-1982. Of course,

a proper assessment of the causes of the relative stabilization of the

macroeconomic situation on the Soviet consumer goods market in the early

1980s requires a more detailed analysis (including, for instance, foreign trade

17

second half of the 1980s and from 1988 onwards the situation worsensconsiderably: both repressed inflation and excess demand becomerampant during 1989-1991. Second, comparing the different estimatesof the probabilities of excess demand it can be seen that the estimatesdiffer much less for models II.a-d than for models I.a-d. The

developments). This is beyond the scope of this study.

18

TABLE 3 Unconditional probabilities of excess demand on the Sovietconsumer goods market, 1965-1991

Year I.a II.a I.b II.b I.c II.c I.d II.d

196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991*

0.080.150.330.520.390.840.500.300.970.850.860.990.840.870.280.350.360.730.950.960.950.990.981.001.001.001.00

0.070.130.310.520.380.840.450.210.960.810.850.990.930.940.590.620.400.490.700.700.530.830.911.001.001.001.00

0.090.140.210.330.320.780.530.350.860.360.580.960.870.810.230.520.430.390.440.660.860.900.360.921.001.001.00

0.110.170.250.420.370.820.560.340.880.460.670.970.900.810.320.620.520.540.670.840.930.950.600.991.001.001.00

0.310.290.340.500.320.820.590.400.940.490.470.920.830.760.260.360.460.690.740.770.890.980.680.931.001.001.00

0.090.150.210.450.300.710.460.150.770.570.690.940.920.780.620.700.370.300.380.590.520.640.711.001.001.001.00

0.11 0.15 0.20 0.36 0.24 0.67 0.44 0.23 0.80 0.46 0.51 0.85 0.61 0.57 0.04 0.13 0.17 0.37 0.55 0.62 0.78 0.85 0.24 0.80 1.00 1.00 1.00

0.120.200.260.490.380.830.610.350.890.590.760.970.890.770.270.560.500.660.820.930.960.960.621.001.001.001.00

Note. Figures ≥ 0.90 are presented in a bold letter. * The figure for 1991 isobtained by calculating CDDE and CS for 1991 using the parameter estimatesof the demand and supply function for 1965-1990.

19

TABLE 4 Conditional probabilities of excess demand on the Sovietconsumer goods market, 1965-1991

Year I.a II.a I.b II.b I.c II.c I.d II.d

196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991*

0.010.020.140.160.100.430.340.681.001.001.001.001.001.001.000.120.100.981.001.001.001.001.001.001.001.001.00

0.010.010.140.210.110.440.390.071.001.001.001.001.001.001.001.000.100.150.980.251.001.001.001.001.001.001.00

0.000.030.020.190.040.290.091.001.000.061.001.001.001.001.000.780.070.100.090.291.001.001.001.001.001.001.00

0.000.970.020.160.370.220.081.001.000.061.001.001.001.001.001.000.070.071.001.001.001.001.001.001.001.001.00

1.001.001.000.050.210.190.081.001.000.040.051.001.001.001.000.020.031.001.000.111.001.001.001.001.001.001.00

0.000.050.020.110.040.220.200.010.270.941.001.001.001.001.001.000.060.100.060.141.001.001.001.001.001.001.00

0.01 0.05 0.02 0.12 0.04 0.18 0.10 1.00 0.61 0.18 0.46 1.00 1.00 1.00 0.00 0.01 0.03 0.06 0.25 0.16 1.00 1.00 1.00 1.00 1.00 1.00 1.00

0.001.000.000.010.010.080.061.001.001.001.001.001.001.001.001.000.011.001.001.001.001.001.001.001.001.001.00

Note. See Table 3.

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TABLE 5 Estimates of percentages of repressed inflation and excess demandon the Soviet consumer goods market, 1965-1991

Year II.a RIt EDt

II.b RIt EDt

II.c RIt EDt

II.d RIt EDt

196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991*

-0.5 0.2 0.5 0.1 0.0 0.0-0.8 0.5 1.2 0.9 0.9 1.6 0.3 2.2 0.0-1.3-1.7-0.9 0.0-0.6 0.5 2.8 3.4 3.7 5.9 8.025.3

-0.5 0.2 0.6 0.3 0.3 0.3-0.6 0.5 1.3 1.5 1.8 2.8 2.0 3.9 2.4 1.0 0.0 0.1 0.7 0.0 0.9 3.3 5.0 6.4 9.613.230.3

0.0 0.5 0.0-0.3 0.0 0.1-0.1 0.9 0.4-0.1 0.7 1.6 1.3 2.5 0.5-0.1-0.7-0.7-0.2-0.1 2.0 3.6 2.6 2.2 5.3 8.024.9

0.0 0.5 0.1-0.2 0.1 0.1-0.1 0.9 0.5 0.1 0.8 1.8 1.7 3.0 1.3 0.7 0.1-0.1 0.3 0.4 2.5 4.2 3.6 3.4 6.7 9.726.5

-0.1 0.6-0.2 0.1-0.2-0.3-0.3 0.2 0.1 0.5 0.9 1.1 1.1 1.4 0.5-0.8-1.6-1.1-0.3-0.1 1.2 2.4 2.5 2.8 5.7 7.524.6

-0.1 0.6 0.0 0.3 0.0-0.2-0.3 0.2 0.2 0.6 1.2 1.8 2.2 3.0 2.6 1.5 0.1-0.2 0.1 0.1 1.3 3.1 4.3 5.6 9.513.230.2

0.0 0.7 -0.1 -0.1 0.0 0.0 -0.1 0.9 0.3 0.2 0.9 1.4 1.2 2.2 0.4 -0.2 -0.7 -0.3 0.2 0.2 2.0 3.3 2.5 2.3 5.2 7.2 23.8

0.0 0.7 0.0 0.0 0.0 0.0 0.0 0.9 0.5 0.4 1.0 1.7 1.6 2.7 1.2 0.6 0.0 0.2 0.7 0.7 2.5 4.0 3.6 3.6 6.7 9.025.4

Note. For EDt, figures exceeding 1.0 are presented in bold. RIt = 100(CDtEQ -Ct)/Ct; EDt = 100(CDtDE - Ct)/Ct. * The figure for 1991 is obtained bycalculating CDEQ and CDDE for 1991 based on the respective estimates for1965-1990 and observed consumption in 1991.

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most virulent excess demand results from model I.a, while the mostmoderate estimates are obtained with model I.d. The differencesbetween the estimates obtained from models II.a and II.d are muchsmaller. Except for this, the probabilities of excess demand based onmodel I are comparable to those based on model II. Third, resultingfrom the impact of the monetary overhang on desired consumption ofSoviet households, excess demand is higher than repressed inflationfrom 1973 onwards. Reflecting the estimate for α, the difference isbigger for models II.a and II.c than for models II.b and II.d. Finally,comparing the estimates of repressed inflation and excess demand for1976-1978 with those for 1988-1991, it is clear that macroeconomicdisequilibrium on the consumer goods market was much more severein the latter period.

In Figure 1 the endogenously determined monetary overhang inconstant (1990) prices is presented for models II.a-d. Figure 1 reflectsthe same story as Tables 3-5, although from a different angle: involun-tary money holdings were very low until the end of 1972, a monetaryoverhang was developing in the 1970s and reached a peak in 1978-1979,then it was decreasing for five or six years, and was increasing againfrom 1985 onwards reaching around 100-120 billion rubles at the end of1990. Measured as a percentage of total household monetary assets, themonetary overhang is estimated to have reached 19-23%. What can alsobe observed is that the pattern resulting from model II.a is comparableto the one resulting from model II.c. The same holds true for models II.band II.d.10 For comparison, the monetary overhang constructed fromthe estimates for models I.a-d is shown in Figure 2. It should be kept inmind that the displayed estimates are based on the assumption thatinvoluntary money holdings do not influence desired consumption(α=0). From Figure 2 can be seen that the estimated level at the end of1990 for model I.a differs distinctly from the one derived from modelI.d.

In Table 6 the respective estimates of the monetary overhang at the

10 The same similarity between the results from, on the one hand, models

II.a and II.c, and, on the other hand, models II.b and II.d, can be observed in

Tables 3-5, which probably reflects the estimate for α.

22

end of 1990 are given as well as those reported by Cottarelli and Blejer(1992) and Van der Lijn (1994). As can be seen, the results from model IIare comparable to the results obtained in Van der Lijn (1994) in a (one-equation) analysis of the consumption or savings function under theassumption of

23

FIGURE 1 Estimates of the monetary overhang in billion rubles at constant(1990) prices, Soviet Union, 1965-1990 (end-year), model II

24

FIGURE 2 Estimates of the monetary overhang in billion rubles at constant(1990) prices, Soviet Union, 1965-1990 (end-year), model I

25

TABLE 6 Comparison of estimates of the monetary overhang at the end of1990 (billion rubles at current prices)1

Disequilibrium model Van der Lijn (1994)2, 4

savingsfunction

Cottarelli and Blejer(1992)3, 4

first year of break

I.a 215I.b 141I.c 136I.d 110

II.a 114II.b 121II.c 102II.d 117

abs.inc.112 (194)distr.lag104perm.inc.103

1982143 (197)1983127 (193)1984117 (193)1985115 (193)1986103 (187)1987 89 (173)

average116 (187)

Note. 1. The figure for M at the end of 1990 is 529.3 billion rubles. 2. Table 2,p.83, based on estimates of savings functions on annual data for 1962/3-1984and the assumption that MO1984 = 0. The explanatory variables of thedistributed lag model and the permanent income model were the same as inspecification b and c, respectively. Abs.inc. is the absolute income model. 3.Table 3, p.276. The consumption function that was estimated was: Dlog(C) =d0 + d1 log(W/C)-1 + d2 log(1+H/W)-1 + d4 Dlog(Y), on annual data for 1964-1985 (D is the first-difference operator, W is wealth, H is human wealth, and Yis disposable income). The monetary overhang was calculated as thecumulated projected (desired) consumption (evaluated along the equilibriumpath) minus actual consumption starting in the first year of the structuralbreak and ending in 1990. 4. Cottarelli and Blejer (1992) cite surveys ofhousehold saving and wealth conducted by the Soviet authorities which claimthat the stock of involuntary money holdings at the end of 1985 was equal to59 billion rubles. The figures in parentheses are based on this assumption andon the assumption that this 'chronic overhang component' increased after1985.

26

macroeconomic equilibrium until the middle of the 1980s. The higherestimates reported in parentheses assume a substantial monetaryoverhang at the end of 1985 (see Table 6, note 3). These estimates arecomparable to the estimates from model I.a, but much higher than theestimates based on each of the other models.

5. Concluding remarks

In this paper a framework for analyzing the macroeconomicsituation on the STE consumer goods market was presented in which adistinction was made between an equilibrium consumption function,which related to repressed inflation, forced saving, and monetaryoverhang, and a disequilibrium consumption function, which related toexcess demand. Within this framework a disequilibrium model wasdeveloped in which the endogenously determined monetary overhangconstituted one of the explanatory variables in the disequilibriumconsumer demand function. Both this model (model II) and thestandard disequilibrium model (model I) were estimated using fourdifferent specifications for consumer demand on annual data for theSoviet Union for 1965-1990. Consequently, estimates were obtained forprobabilities of excess demand, for percentages of repressed inflationand excess demand, and for the volume of the monetary overhang.

In our opinion, the results obtained with model II are superior tothose obtained with model I. First, a priori it is to be expected thatconsumers would like to spend at least part of their involuntary moneyholdings if they would have the opportunity to do so. Hence, model IIseems to come somewhat closer to reality than model I. The a prioriconsiderations were confirmed ex post regarding the estimate for α,which was positive and significant for all four specifications for thedemand function. As a result, the estimates for excess demand werehigher than those for repressed inflation for years where householdinvoluntary money holdings were positive. Second, the estimatesobtained with model II are much less sensitive to the choice of theconsumer demand function than the estimates obtained with model I.

The results for model II show a sharp worsening of the macroeco-nomic situation on the Soviet consumers goods market in the second

27

half of the 1980s. Although the monetary overhang at the end of 1984 isestimated to have been moderate, especially for models II.a and II.c, it isestimated to have reached 19-23% of total household monetary assets atthe end of 1990. Moreover, the estimated percentages of repressedinflation and excess demand are very high for 1989-1991. Regarding the1970s, the analysis in this paper evidences the existence of aggregateexcess demand in the second half of this period, most notably from1976-1978. However, the conclusion seems to be justified that theemergence of large macroeconomic disequilibrium and rapidly risingexcess demand on the consumer goods market in the late 1980s was initself sufficient to have caused the collapse of state retail trade in 1990-1991, even had there been macroeconomic equilibrium until the middleof the 1980s.

Appendix

Unless stated otherwise, all data series are taken from NarodnoeKhozyaistvo SSSR (Narkhoz, various years). All figures are deflated to obtainconstant (1983) price series. Data for 1991 come from Ekonomika i Zhizn' no. 6,February 1992. Household disposable income (YD) is money incomes of thepopulation (provided by Goskomstat) minus taxes from the population in theState Budget. Household monetary assets (M) is calculated as the stock ofhousehold savings deposits + household cash holdings (provided byGoskomstat) + 3% lottery bonds - net borrowing of households at the end ofthe year. Household saving in year t (St) is defined as Mt-Mt-1, householdconsumption (C) is equal to household disposable income minus householdsaving. The alternative consumption price index used to deflate these series istaken from Pickersgill (1980b), for 1961-1970, and from Marer (1992, p.204-205), for 1971-1990. GNP data are constructed from CIA estimates of growthof real GNP for 1960-1970, as published in Harrison (1993, Table 1), GNPindices in constant prices for 1970-1990, as published in Marer (1992, p.204-205, "Building block"), and the figure for 1987 (in 1987 prices), taken fromNarkhoz (1990, p.5). Other variables were constructed as follows: YDtS =(YDt+1 + YDt + YDt-1)/3; YDtP = (YDt + YDt-1 + YDt-2)/3; YDtT = YDt - YDtP; GX= GNP - GNPT; MX = M - MT. The trend variables CT, GNPT, and MT wereconstructed by fitting a second order exponential time trend to the observed

28

variables for 1962-1990.The (currently released) official figures for household cash holdings

used in this study are lower than the estimates of Birman. IMF et al. (1991)and, apparently, Cottarelli and Blejer (1992) also made use of these officialfigures. For 1985-1990 household cash holdings data can be found in Narkhoz(1990, p.28). It appears that Goskomstat has slightly revised the figures for1987-1990 after the publication of Narkhoz (1990; the figures were provided tome end-1992). The figures used by Ellman (1992, Figure 6.2) for 1985-1990 arecomparable to the ones published in Narkhoz (1990). However, he used analternative estimate for household cash holdings at 1-1-1981 of 65 billionrubles, which is 14.1 billion rubles higher than the figure used in this study. Itshould be noted that Ellman's figures would imply that the saving rates in theearly 1980s would have been even lower than those used in this study.Consequently, the use of Ellman's figures would have resulted in even lowerestimates of repressed inflation and excess demand for 1980-1984 than theones presented in Table 5.

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