OLDRICH KYN and JIRI SLAMA: CONSUMPTION FUNCTION FOR CZACHOSLOVAKIA Introduction 1

OLDRICH KYN and JIRI SLAMA

Macroeconomic Consumption Functions for Czechoslovakia:

A Planners' Permanent Income Hypothesis

in: Ulrich Gaertner , Jiri Kosta eds.

Wirtschaft und Gesellschaft

Duncker & Humblot, Berlin, 1979

A. Introduction

Until recently the consumption function had played next to no role in Soviet-type macroeconomics and had rarely been estimated. The apparent reason for this neglect was the generally accepted view that the centrally planned economies were supply rather than demand-oriented and that, therefore, capacity constraints, as represented by the production function, for example, were much more important for explaining the level of economic activity than any of the elements of aggregate demand.

This may very well be true, although aggregate output is not determined by capacity alone, as is obvious from the fact that considerable fluctuations in the degree of utilization of factors of production can be observed in all centrally planned economies¹. Such fluctuations are, however, hardly caused by changes in aggregate demand. The Keynesian multiplier cannot really work in an economy in which the activities of producers depend on centrally prescribed targets rather than on decentralized market signals.

Around the beginning of the nineteen-seventies the situation changed dramatically and empirical estimates of macroeconomic consumption functions for the Soviet Union, Czechoslovakia, Poland, Hungary and East Germany began to appear one after the other. Most of them were just parts of econometric models of the respective countries², although a few independent studies of consumption and saving behavior also appeared³.

Some of the estimated consumption functions were demand-oriented and, like the consumption functions for the market economies, were supposed to model consumers' behavior. Others considered aggregate consumption to be determined by the supply of consumer goods. Still others tried to incorporate both the demand and supply sides into the model

It is not our purpose here to review already estimated consumption functions but to look at the question of whether it is at all meaningful to formulate and estimate macroeconomic consumption functions for Soviet-type economies and whether such functions would represent the behavior of consumers, of planners, or of both. The theoretical deductions will be supported by empirical estimates for Czechoslovakia, which are, alas, only fragmentary.

To contrast the macro-determination of consumption in Soviet-type and market economies, we shall present first a highly simplified version of the familiar Keynesian model.
The aggregate demand for final goods Z (intermediate goods are excluded from the analysis) consists of the final demand for consumer goods C, investment I, and government purchases G.

(1)                         Z = C + I + G

The demand for consumer goods is a (linear) function of disposable income Y^D.

(2)                         C = a_o + a₁ Y^D

The demand for investment goods depends on aggregate income Y and on the interest rate r.

(3)                         I = I (Y, r)

The aggregate final product Y, (which is by definition equal to aggregate income) is in equilibrium equal to aggregate demand.

(4)                         Y = Z

Finally, disposable income is equal to aggregate income minus taxes T, which again depend on income.

(((5)                         Y^D = Y - T (Y)

The structure of this model clearly reflects the institutional setup and operational features of a market economy. The primary role of demand in the determination of the level of economic activity can be seen from the fact that capacity constraints do not even appear. The crucial equilibrium condition (4), which is usually omitted, makes sense only if production adjusts practically instantaneously to demand, as is the case in a well functioning market economy.

The three most crucial components determining the aggregate demand and therefore also the level of economic activity are
(i) consumer behavior modeled by the consumption function (2)
(ii) entrepreneurial behavior modeled by the investment function (3)

(iii) governmental fiscal policy (the monetary sector was excluded for the sake of simplicity) which determines government expenditures G and tax rates, i.e. the function T(Y).
The importance of the assumption of a well functioning market, which justifies the validity of the equilibrium condition (4), cannot be overemphasized. If, for example, aggregate consumption were constrained by the supply of consumer goods rather than by demand, then empirical estimates obtained by regressing the observed consumption expenditures on the observed disposable income would not properly represent consumer behavior.

It is quite obvious that the model described above cannot account adequately for a Soviet-type economy, where planners set production targets, allocate resources, and fix prices and wages, and where market forces cannot exert their spontaneous equilibrating function.

Because consumers obviously cannot consume what has not been produce and the output of consumer goods is clearly determined by planners, it can be argued that the macroeconomic consumption function in the Soviet-type economy would represent the planners' rather than the consumers' behavior. On the other hand, consumer goods are not rationed - at least not in the recent form of the Soviet-type economy – so that the individual consumer is free to spend his disposable income as he wishes and particularly he cannot be forced to consume what he does not want. This may imply that the macroeconomic consumption function could represent the behavior of consumers in dividing their disposable income between consumption expenditures and saving as it does in market economies.
As we shall see, these two seemingly contradictory views can be reconciled, if the model is made to contain two behavioral equations rather than one.
The first equation, which can be conveniently named "the planners' consumption function'', would model the determination of the supply of consumer goods, while the second equation, or "the consumers’ consumption function", would model the demand for consumer goods. The place of these two equations in the overall model can be seen from the following exposition.⁴

In their attempt to coordinate the economy, planners use a complex system of partial (individual) and aggregate (synthetic) balance sheets. We shall describe them in a simplified way, using the familiar input-output notation.

The interrelated system of material balance sheets for individual products can be described by the following input-output equation

(6) q = Aq + c + i + g

where

A is a matrix of planned norms of technological consumption (input-output coefficients)

q is a vector of output targets for the production of individual goods

c is a vector of targets for the supply of consumer goods

i is a vector of targets for the supply of investment goods

g is a vector of targets for the supply of other final products.

Given the technologically determined⁵ matrix A, planners must simultaneously determine vectors q, c, i, and g in such a way that the balance conditions (6) are met.

In addition to that, material balance sheets (6) serve also to determine the allocation of intermediate goods (plan of material-technical supplies), which can be represented by the following matrix

(7)                         Q = Aq^

where
Q is a matrix with a typical element Q_ij representing the planned allocation of the intermediate product i for the production of product j;

q^ is a diagonal matrix made up of the vector of production targets q.

When setting output targets, planners must inspect "balance sheets of labor" to take into account labor constraints

(8)                         Gq £ l

where
L is a matrix of planned labor requirements per unit of output, whose typical element L_ij epresents the quantity of rth kind of labor needed to produce one unit of product i

l is a vector of available labor of the individual kinds.

Balance sheets of labor help to allocate the labor force:

(9)                         L = Gq^

where

L is a matrix the typical element L_rj of which represents the quantity of rth kind of labor allocated to the production of product j.
Planners also have to take into account capacity constraints in order to be able to allocate investment in such a way that the capital stock of each industry is sufficient to produce the planned output. They use "balance sheets of fixed capital" (basic funds) for this purpose.

(10)                         Bq^ £ K + J - R

(11)                         Ju = i

where
B is a matrix of planned technological capital-output norms

K is a matrix representing the allocation of the existing capital stock in the previous year
J is a matrix of the allocation of investment goods
R is a matrix of planned scrappage of the old capital stock
u is a unit or "summation" vector u' = (1, 1,.....l)
i is the vector of supply of investment goods from the equation (6)

Planners also fix prices, wage rates, profit margins and "turnover tax" margins in such a way that the following price equations hold:

  (12)                         p'= p'A + w'G + d' + z'

(13)                         p' = p' + v'

where
p is a vector of "wholesale" or producer prices
p is a vector of "retail" or consumer prices
w is a vector of wage rates for different kinds of labor
d is a vector of depreciation
z is a vector of profit margins
v is a vector of 'turnover tax' margins.

If planners were successful in "balancing" the plan, then equations (6) to (13) would guarantee that equilibrium between supply and demand for intermediate and investment goods was achieved; however, no such equilibrium would be guaranteed for consumer goods. In the absence of rationing, planners can influence the demand for consumer goods only indirectly by manipulating the disposable incomes of the population and retail prices. In this way, they could try to achieve equilibrium on the consumer goods market

(14)                         c = c^D (Y^D, p)

where
c is a vector of supply of consumer goods, from eq. (6)
c^Dis a vector of demand functions for consumer goods
Y^D is the disposable income of the population
p is a vector of retail prices.
The above system of equations (6) to (14) can guarantee general equilibrium between supply and demand for both producer (i. e. intermediate and investment) and consumer goods, providing that planners
(a) know the right form of the demand functions c^D(Y^D, p),
(b) are able to solve the equations simultaneously, and
(c) the plans are perfectly fulfilled.
It is clear that direct simultaneous solution of the planning equations would be an enormously difficult task. To facilitate the planning process, planners usually try to establish first the overall balance between macroeconomic aggregates such as gross social product (GSP), national income (NI), aggregate consumption, investment, etc.
For that purpose, they use aggregate balance sheets of which we shall here discuss only two, namely the balance sheet of the creation, distribution, redistribution, and final use of the gross social product and national income, and the balance sheet of money incomes and expenditures of the population.
  The balance sheet of gross social product and national income can be obtained by aggregating the system of partial material balance sheets. It can be described by the following identities:

Creation of GSP:

(15)                         P = p'q + v'c

where
P is gross social product (GSP)
p', q, v', c are vectors defined in eq. (6), (12) and (13).
The first term on the right-hand side is the gross value of output at producer prices, while the second term is the aggregate volume of turnover tax which is assumed to be charged on consumer goods only
Creation of NI:

(16)                         Y = P - p'Aq - D

where
Y is national income created
D is aggregate volume of depreciation.
Apparently national income created (sometimes called also net material product) is equal to GSP minus aggregate material costs (or aggregate value of intermediate goods) and minus depreciation.

Primary distribution of NI:

(17a)                         Y = W + Z + V

(l7b)                         W = w'Lu = w'Gq

(17c)                         Z = z'q

(17d)                         V = v'c

where
W is aggregate wage income

Z is aggregate profit of firms

V is aggregate turnover tax

w', v', z', c, q, L, G are vectors or matrices defined in (6), (8), (9), (12) and (13)

u is the summation or unit vector.

The meaning of the primary distribution of national income is evident from eq. (17a) to (17d). We shall skip the redistribution and go directly to the final use of national income.
Final use of NI:

(18a)                         Y = C^S + I + G

(18b)                         C^S=p'c

(18c)                         I = p'i

(18d)                         G = p'g

where
C^S is the aggregate supply of consumer goods priced at retail prices
I is aggregate investment
G is the aggregate value of final product used for other purpose then consumption and investment
p, p, c, i, g are vectors as defined in (6), (12) and (13).
The balance sheet of money incomes and expenditures of the population reflects the formation and use of disposable income.

Formation of disposable income:

(19)                         Y^D = W + R - T

where
Y^D is the disposable income of the population

W is wage income from the primary distribution of national income
R represents other money incomes of the population created in process of the redistribution of national income
T are taxes and other deductions from the money income of population paid to the state budget or social organizations.

Use of disposable income:

(20a)                         Y^D = C^D + S

(20b)                         C^D = p'c^D

where
C^D represents money expenditures of the population on purchases of consumer goods
S represents aggregate saving.
It is necessary to point out that the formation of disposable income is fully under the control of planners because they determine the aggregate wage income W (by fixing the wage rates w and the allocation labor L) as well as other incomes R and taxes T.
On the other hand use of disposable income, that is its division into consumption expenditures and saving, depends primarily on consumer behavior and can be influenced by planners only indirectly.
Overall aggregate balance in the economy requires that consumer demand be equal to the supply of consumer goods:

(21)                         C^D = C^S

This equilibrium can be achieved provided planners know the behavioral pattern of consumers and are able to predict with sufficient precision how much of disposable income will be saved.
We conjecture that consumer behavior under Soviet-type socialism does not differ much from that under market capitalism. We therefore regard C^D as a function of disposable income and possibly some other variables.

(22)                         C^D= C^D(Y^D,...)

This is what we call the consumers' consumption function.
Unlike in the case of a market economy, we cannot assume that in the Soviet-type economy the supply of consumer goods is automatically adjusted to demand; rather it is determined by planners, simultaneously with investment, when they plan the final use of national income. We can conjecture that the planners' target for the aggregate supply of consumer goods depends on the level of national income and possibly on some other variables.

(23)                         C^S = C^S(Y,...)

This is the planners' consumption function.
The submodel consisting of eq. (21), (22) and (23) is identified and therefore both the consumers' consumption function (22) and the planners' consumption function (23) can be estimated. Clearly, this possibility depends in a crucial way on the assumption that the equilibrium condition (21) holds at least approximately.

For example, if C^S were smaller than C^D, then observed purchases would be equal to the supply of consumer goods, C^D would be unobservable, and involuntary savings would appear. In such a case, the consumers' consumption function would not be estimable. In the opposite case, C^S would be unobservable, stockpiling of unsold consumers goods would appear, and the planners' consumption function could not be estimated.
In the remaining part of this paper we shall present estimates of both consumers' and planners' consumption functions for Czechoslovakia.

The data for the planners' consumption function are taken from the official statistical yearbook while the data for the consumers' consumption function⁶ are taken from the study of Janacek (1972), because disposable income is not normally published in statistical yearbooks. Unfortunately, these two sets of data are not fully compatible, because the first contains only annual data in constant prices while the second contains both annual and quarterly data in current prices. Both equations were estimated only by single equation methods and no attempt was made to correct the estimates for simultaneity bias.

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:
"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."

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

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) C_t^D = a₀ + a₁Y_t^D + u_t

Table 1

The Consumers’ Consumption Function.

Eq. (24)

			Estimated Parameters (Standard Errors)
No.	Data	Method	a₀				a₁	ARC	R²	DW	F
1.	A	OLSQ	1432.38 (951.37)				.956 (.008)	.034 (.258)	.9991	1.808	16188.8
2	QU	CORC	-2576.70 (495.35)	586.88 (236.38)	1327.80 (237.02)	2525.06 (242.76)	.953 (.013)	.278 (.162)	.9953	1.397	1628.9
3	QU	CORC	-2688.64 (659.07)	495.07 (204.94)	1239.01 (226.40)	2431.13 (214.60	.956 (.018)	.278 (.162)	.9955	1.746	1650.1
4	A	QSA	721.80 (441.18)				.943 (.012)	-003 (.189)	.9944	2.004	6079.5

A	annual data	CORC	Cothran-Orcutt iterative procedure
QU	quarterly unadjusted data	ARC	autoregressive coefficients
QSA	quarterly seasonally adjusted data	DW	Durbin-Watson statistic
OLSQ	ordinary least squares method

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.

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.

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) C_t^D = a₀ + a*₁Y_t^D + l C_t-1^D + u_t

Table 2

The Consumers’ Consumption Function.

(Koyck Transformation)

Eq. (25)

No.

Data

Method

Estimated Parameters

(standard errors)

ARC

R²

a₀

a₁

OLSQ

724.42

(1533.00)

.892

(.077)

.077

(.094)

-.052

(.267)

.9991

l.9l65

6499.29

OLSQ

-3323.48

(872.80)

512.58

(730.23)

1038.15

(514.91)

2287.09

(572.34)

.876

(.089)

.091

(.100)

.288

(.164)

.9952

1.396

1213.78

CORC

-2999.82

(929.10)

700.95

(64046)

1239.16

(453.61)

2465.18

(494.97)

.896

(.077)

.065

(.087)

.288

(.164)

.9956

1.817

1217.4

QSA

OLSQ

-319.69

(403.24)

.571

(.074)

.423

(.083)

-.185

(1.102)

.9968

2.191

5042.1

A	annual data	CORC	Cothran-Orcutt iterative procedure
QU	quarterly unadjusted data	ARC	autoregressive coefficients
QSA	quarterly seasonally adjusted data	DW	Durbin-Watson statistic
OLSQ	ordinary least squares method

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 %.

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) C_t = a₀ + S_s=0^d b_s Y_t-s + u_t

(26b) b_s= S_r=0^rg_rs^r

d is the length of of period over which the lag is distributed

r is the degree of the polynomial.

Sometimes the lag function is forced through the origin at the (d + 1) period by adding the zero restriction:

(27) b_d_{+ 1}= 0

Table 4

The Consumers' Consumption Function with Polynomially Distributed Lag

(Eq. 26)

Reg.
No.

Data

Zero

Restr-
iction

Length
of
lag

Degree
of
Polynom.

Estimated parameters

(standard errors)

Sum of

Lag

Coef.

Mean

Lag

R²

a₀

b₀

b₁

b₂

b₃

b₄

685.21

(1468.13)

.872

(.090)

.097

(.104)

.968

(.164)

.100

(.093)

.9991

1.792

6596.3

Yes

685.46

(1468.13)

.872

(.090)

.097

(.104)

.968

(.164)

.100

(.093)

.9991

1.792

6596.4

862.96

(1841.96)

.816

(.111)

.269

(.203)

-.122

(.125)

.963

(.020)

.025

(.130)

.9991

1.650

3524.0

Yes

933.23

(1842.24)

.847

(.069)

.199

(.032)

-.083

(.055)

.963

(.021)

.035

(.128)

.9990

1.677

3481.69

QSA

-43.35

(618.86)

.533

(.072)

.295

(.035)

.127

(.044)

.026

(.040)

-.006

(.078)

.975

(.021)

.619

(.328)

.9967

1.213

2065.42

QSA

Yes

-80.30

(592.01)

.544

(.075)

.278

(.050)

.166

(042)

.034

(.043)

.004

(.055)

.976

(.019)

.645

(.295)

.9968

1.230

2876.70

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 b_s 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.

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.

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 disability 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.

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 opportunities available.

C. The Planners' Consumption Function

We have seen that consumer behavior, as suggested by the estimated consumers' consumption function, is trivial; people seem to consume a very high and almost fixed proportion of their disposable income, with no discernible time lag. We would not expect the planners consumption function to be as trivial. If the consumer does not think in terms of the future, the planner surely does. Surprisingly, the plot of consumption expenditures against national income in Diagram 2 suggests that in the specification of the equation (23) we can start again with the most simple linear form.

Diagram 2.

(28) C^S_t = a₀ + a₁Y_t+ u_t

The following table showing the estimates of equation (28) supports this intuitive feeling.

Table 6

The Planer's Consumption Function

Eq. (28)

No.	Method	Estimated Parameters (standard errors)		ARC	R²	DW	Standard Error of Regression
No.	Method	a₀	a₁	ARC	R²	DW	Standard Error of Regression
15.	OLSQ	10.288 (1.869)	.517 (.009)	.478 (.176)	.992	1.00	3.513
16.	CORC	9.453 (3.360)	.519 (.016)	.476 (.176)	.994	1.84	3.058

Immediately, however, we see three marked differences:

(a) The intercept is much larger and significantly different from zero. This implies that the average share of consumption in national income was larger than the marginal share, and was declining.

(b) Planners' "marginal propensity to consume a₁ is only about .52 which is, of course, much lower than the propensity of consumers. In the long run, planners allocate 52 percent of the increment of national income to increase personal consumption while the remaining 48 percent is used for other purposes, including investment and public consumption.

(c) The low Durbin-Watson statistic and the large and significant autoregressive coefficient indicate that the specification of the consumption function is not fully satisfactory. In Diagram 2 we see peculiar fluctuations that were not detected in the consumers' consumption function. These fluctuations are even more apparent from the plot of residuals (Diagram 3).

Diagram 3.

The Cochrane-Orcutt iterative procedure worked well in correcting for autocorrelation, but the cause of the cyclical fluctuations remains unexplained. One plausible explanation of observed fluctuations is that planners' behavior is similar to consumer behavior in a market economy as postulated by the permanent income hypothesis.

The planners' permanent income hypothesis assumes that planners have their own idea about the long-run normal growth path of the economy and that they consider the level of national income corresponding in each year to such a long-run normal path to be normal or "permanent" national income. The difference between actual national income and the "permanent income" can then be called the "planners' transitory income".

The normal or "permanent" national income is obviously not constant, and it is usually not equal to planned national income. Planners can and frequently do plan for faster or slower growth than the long-run normal growth rate.

We can now formulate the planners' permanent income hypothesis as follows:

Planners' decisions about the final use of national income depend on the ratio between the transitory and permanent components of national income. Specifically, investment is positively and consumption is negatively related to this ratio; or, to put it differently, the share of investment is higher in transitory than in permanent income, while for the share of consumption the opposite is true.¹⁴

The motivation for this hypothesis came from empirical investigation of planners' investment and consumption decisions and in particular from the pioneering study of W. Schrettl (1974), who scrutinized the so called "shock-absorber hypothesis" according to which the "Soviet investment is much more stable than in Western market economies, this stability being achieved by curtailing consumption in case of insufficient national income".¹⁵Schrettl estimated several variants of the macroeconomic investment function for the Soviet economy, among which the most interesting variants related aggregate investment or deviations of investment from their trend to fluctuations in the rates of growth of national income or to deviations of national income from its trend. He found that "investment is to a considerable degree affected by fluctuations of national income" and that "investment participates almost twice as much in increments of national income than is its average share";¹⁶ these findings led him to the conclusion that "the shock-absorber hypothesis... is wrong in its extreme form as well as in its moderate form. All regressions indicate that the opposite is true, namely that not the consumer but investment 'suffers'."¹⁷
Portes and Winter in their recent study¹⁸tested a similar hypothesis by estimating the planners' (i.e. supply) consumption functions for Czechoslovakia, Poland, Hungary, and East Germany. They maintained that in their decisions about the supply of consumer goods planners respond differently to long-run factors (for which they took trend values of various macroeconomic indicators) than to short-run deviations and exogenous shocks. Their results led them to conclude that "planners exhibit stable resource allocation behavior¹⁹ and to reject "a common theme of the literature on CPEs" which considers "consumption to be a 'buffer' which absorbs all shocks"²⁰. Specifically for Czechoslovakia they found that "the consumption-goods supply is completely protected from deviations from trend in total output".²¹

At first glance it may seem that the planners' permanent income hypothesis contradicts the traditionally assumed goal of planners, namely maximization of the rate of economic growth. However, Schrettl has recently demonstrated theoretically²² that planners' behavior may protect consumption from short-run fluctuations, provided that consumers can exert pressure on planners by withdrawing labor (or diminishing their efforts) if the real consumption planned for them is in their view inadequate.

In this paper we shall test the implications of the planners' permanent income hypothesis for the planners' consumption function only.²³Because the "permanent national income" is unobservable and because it is not clear a priori exactly how planners' behavior is influenced by the ratio of transitory to permanent income, we shall estimate several alternatively specified variants of the planners' consumption function.

Let us begin with the widely used assumption that permanent income is formed in the process of adaptive expectations. This approach is known to lead to consumption functions with distributed lags. The Koyck transformation of the planners' consumption function with a geometrically distributed lag gave quite good results (Table 7). The addition of lagged consumption to the right-hand side of the equation (28) improved the fit as measured by R² only slightly, but the autcorrelation disappeared and the lag coefficient l was significant at the 2 % level. The long-run MPC is .513, which is very close to a₁ estimated from the consumption function without a lag. The estimated l = .489 implies a moderately long mean lag of .956 years.

Table 7

The Planners' Consumption Function

(Koyck Transformation)

No.

Method

Estimated Coefficients

(standard errors)

R²

SER

a₀

a₁

OLSQ

5.391

(2.444)

.276

(.099)

.489

(.197)

.994

1.78

3.16

1755.7

The consumption function with a polynomially distributed lag gave results similar to the Koyck transformation when the lag was distributed over 4 to 5 years, the degree of the polynomial was low, and the zero condition was imposed (Table 8 and Diagram 4 a).

Table 8:

The Planners' Consumption Function

with Polynomially Distributed Lag

(4 - 5 years)

Eq. (26)

Estimated parameters

(standard errors)

Method

Zero

Restri-
ction

Length of
lag

Degree of Polynom.

a₀

b₀

b₁

b₂

b₃

b₄

Sum of

Lag

Coef

Mean

Lag

ARC

R²

SER

OLSQ

yes

7.822

(2.318)

.342

(.071)

.162

(.004)

.045

(.039)

-.009

(.038)

.539

(.014)

.415

(.332)

.495

(.193)

.992

1.091

3.51

1193.47

CORC

yes

6.695

(3.794)

.397

(.987)

.164

(.006)

.966

(.048)

.011

(.047)

.547 (.021)

.600

(.399)

.495

(.193)

.993

1.692

3.11

1387.94

OLSQ

yes

7.822

(2.379)

.342

(.073)

.162

(.004)

.045

(.040)

-.909

(.039)

.539 (.014)

.415

(.341)

.314

(.202)

.992

1.091

3.60

755.86

CORC

yes

6.696

(2.953)

.520

(.120)

-.130

(.136)

-.041

(.062)

.200

(.097)

.550 (.017)

.708

(.347)

.314

(.202)

.994

1.808

2,86

1092.29

OLSQ

yes

6.880

(2.480)

.290

(.056)

.168

(.010)

.078

(.019)

.020

(.030)

-.008

(.024)

.549 (.015)

.855

(.368)

.456

(.194)

.991

1.090

3.50

1001.31

CORC

yes

7.092

(4.432)

.273

(.075)

.165

(.013)

.083 (.027)

.029

(.041)

.008

(.032)

.550 (.025)

.763 (.495)

.456

(.194)

.992

1.548

3.20

1176.21

Diagram 4a.

This version of the consumption function indicates a somewhat shorter mean lag of .5 to .75 of a year. The presence of autocorrelation suggests that the lag structure may not have been well specified.

The mean lag increased to 1.5 - 2.5 years, and the autocorrelation disappeared when the lag was distributed over longer periods of 8 - 9 years and the degree of the polynomial was increased (Table 9). However, the shape of the lag, as can be seen from Diagram 4b, is unreasonable and many of the lag coefficients are negative and/or insignificant.

Table 9.

The 'Planers' Consumption Function'

with Polynomially distributed Lag

(8 - 9 years)

(Eq. 26)

No.
____

zero

restr.

Lag

length

____

degree

a₀

b₀

b₁

b₂

b₃

b₄

b₅

b₆

b₇

b₈

Sum

lag

coef.

Mean

lag

auto

regr.

coef

R²

SER

10.944

.304

.134

.025

-.032

-.041

-.012

.050

.138

.565

1.995

.305

.995

1.44

2.77

474.62

(2.669)

(.073)

(.032)

(.049)

(.031)

(.032)

(.050)

(.032)

(.080)

(.020)

(.552)

(.224)

10.272

.339

.120

-.003

-.044

.026

.024

.072

.079

.561

1.740

.274

.994

1.47

2.75

605.32

yes

(2.594)

(.000)

(.059)

(.051)

(.028)

(.041)

(.037)

(.023)

(.051)

(.017)

(.513)

(.227)

10.143

.352

.110

-.011

-.041

-.016

.029

.070

.071

.561

1.896

.274

.994

1.47

2.66

863.03

yes

(2.394)

(.045)

(.016)

(.027)

(.026)

(.017)

(.014)

(.020)

(.019)

(.015)

(.411)

(.227)

11.640

.289

.120

.026

-.025

.033

-.018

.030

072

.095

.571

2.383

.286

.994

1.43

2.77

415.80

(3.054)

(.059)

(.017)

(.034)

(.031)

(.020)

(.031)

(.040)

(.023)

(.075)

(.018)

(.642)

(.234)

11.020

.317

.118

.008

-.034

-.020

.006

.046

.072

.063

.560

2.173

.243

.994

1.48

2.67

659.54

yes

(2.684)

(.040)

(.014)

(.021)

(.024)

(.010)

(.012)

(.014)

(.010)

(.016)

(.010)

(.460)

(.235)

12.484

.249

.136

.051

-.005

.032

-.030

.000

.019

.147

.175

2.668

.267

.094

1.31

2.73

535.13

(2.019)

(.030)

(.014)

(.012)

(.017)

(.020)

(.017)

(.012)

(.017)

(.035)

(.017)

(.516)

(.234)

11.029

.317

.110

.000

.034

-.020

.006

.046

.072

.063

.508

2.173

.228

.994

1.48

2.57

803.44

yes

(2.567)

(.030)

(.013)

(.020)

(.023)

(.010)

(.012)

(.014)

(.010)

(.015)

(.016)

(.451)

(.236)

Diagram 4b.

In the next step, we shall try to introduce the "permanent" income and the "transitory" income into the consumption function explicitly. As they are both unobservable, we have to find proxy variables for them. We suggest that a reasonable proxy variable for the planners' "permanent" income may be the fitted value of national income from the aggregate production function and the proxy for transitory income may be the deviation of the actual national income from its fitted value. The obvious reason for this suggestion is that the fitted value of production functions can be interpreted as a hypothetical national income which would have been produced under the normal (in the long-run sense) utilization of factors of production and with the normal growth of factor productivity.

For the purpose of this paper, it will suffice to use the Cobb-Douglas production function²⁴with constant returns to scale, preassigned capital and labor elasticities²⁵, and disembodied technical change with a quadratic term in the exponent

(29) Y_t= A₀K_t^.35L_t^.65 exp(r₀t + 1/2 r₁t²)

Y_t is National Income

K_t is undepreciated stock of fixed capital

L_t is employment.

The parameters estimated from the logarithmic transformation of (29) are shown in Table 10 and the fitted values Y_t are shown in Table 3 in the Appendix.

Table 10

Trend in Total Factor Productivity

Eq. (29)

No.	Method	Estimated parameters (standard errors)			R²	DW	SER	F
		logA₀	r₀	r₁
31	OLSQ	-5.658 (.031)	.0654 (.0053)	-.0021 (.0004)	.974	.37	.049	429.4

As suggested by the planners' permanent income hypothesis we shall estimate the consumption function with the ratio of transitory to permanent income added to the right-hand side. Under our assumption, the permanent income is Y_t and transitory income Y_t - Y_t so that we can define the new right-hand variable as follows:

(30) E_t = (Y_t - Y_t)/Y_t

The new specification of the consumption function is

(31) C^S_t = a₀ + dE_t + a₁Y_t+ u_t

According to our hypothesis we expect d to be negative. The estimates of equation (31), as shown in Table 11, are satisfactory. Compared with the results of Table 6, all the statistics improved while the estimated values of a₀ and a₁ remained virtually unchanged. The most important outcome of the new regression is that the coefficient d has the right sign and proved to be highly significant for the explanation of the short-run variations in the Czechoslovak consumption expenditures.

Table 11

The Planners' Consumption Function

with the Relative Transitory Income

Eq. (31)

No.	Method	Estimated parameters (standard errors)			ARC	R²	DW	SER	F
No.	Method	a₀	d	a₁	ARC	R²	DW	SER	F
32	OLSQ	9.665 (1.447)	-.490 (.117)	.267 (.193)	.267 (.193)	.996	1.46	2.71	2611.94
33	CORC	9.934 (2.068)	-.477 (.149)	.522 (.010)	.267 (.193)	.996	1.86	2.66	2486.90

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.

Diagram 5.

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 = (C_t - C_t)/C_t

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

Diagram 6.

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 C_t and the "transitory" C_t* . The permanent component depends on "permanent" income Y_t defined again as the fitted value of the production function, so that

(33)                         C_t = a₀ + a₁ Y_t + u_t

The "transitory" component then depends on "transitory income" Y_t - Y_tso that

(34)                         C*_t = a*₀ + a*₁ (Y_t - Y_t ) + u*_t

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

(35)                         C_t = a₀ + a₁ Y_t + a*₁ (Y_t - Y_t ) + 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

Obviously the transitory propensity a*₁is 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.

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.

Diagram 7.

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.

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".
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.

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.

E. Appendix

Table 1.

Annual Data used in estimating "Consumers' Consumption Function"

(Current prices, in billions Kcs)

Year	Disposable Income Y^D	Consumption Expenditure C	C/Y in %
1954	80.926	78.460	96.95
1955	86.023	83.690	97.29
1956	92.050	88.805	96.47
1957	98.032	95.008	96.92
1958	99.335	96.270	96.91
1959	104.105	100.881	96.90
1960	109.518	108.057	98.66
1961	116.289	112.040	96.35
1962	119.510	116.812	97.74
1963	122.750	120.139	97.87
1964	129.649	125.304	96.65
1965	138.142	133.041	96.30
1966	146.432	145.690	96.39
1967	156.141	149.224	95.57
1968	173.904	167.096	96.08
1969	192.172	186.379	96.99

Source: K. Janacek, Makroekonomicka spotrebni funkce, Ekonomicky ustav

CSAV, Praha 1972, p.109.

Table 2.

Quoterly Data Used in Estimating "Consumers' Consumption Function"

(in billions of Kcs at current prices)

Disposable Income
Y

Consumption Expenditure
C

C/Y

III

1961

29.185

28.220

29.051

29.883

25.578

27.015

28.778

30.679

88.8

95.7

99.1

102.7

1962

29.788

29.327

29.966

30.704

25.955

29.177

29.659

32.296

87.1

99.5

98.0

105.2

1963

29.634

29.959

31.049

32.591

26.224

29.572

30.857

33.951

88.5

98.7

99.4

104.2

1964

31.707

31.457

32.282

34.258

28.077

30.419

31.893

34.970

88.6

96.7

98.8

102.1

1965

33.031

33.233

35.236

36.592

28.583

32.264

34.526

37.068

86.5

96.9

97.8

102.9

1966

34.420

35.283

36.393

39.594

30.553

34.105

35.615

40.159

88.8

96.7

97.9

101.4

1967

36.728

37.693

38.940

42.969

32.587

35.925

38.115

42.786

88.7

95.3

97.9

99.6

1968

40.696

41.311

42.869

49.028

35.340

39.750

43.14 1

48.865

86.8

96.2

100.6

99.7

1969

46.141

46.250

47.202

52.616

40.638

45.213

47.252

53.315

88.1

97.8

100.1

101.3

Source: K. Janacek, Makroekonomicka' spotrebni funkce, Ekonomicky ustav CSAV, Praha 1972, p.111.

Table 3:

Annual Data used in estimating "Planners' Consumption Function"

	National Income	Consumption Expenditures	%	Fixed Capital	Employment	Normal Level of NI	Relative Deviation of Y from Y
	Y	C	C/Y	K	L	Y	E
1948	74.2000	52.2000	70.3503	331012.	4842.00	'79.0760	-6.16623
1949	81.6199	53.7660	65.8735	338273.	4836.00	84.7271	-3.66718
1950	89.7820	62.6400	69,7689	345444.	4831.00	90.5791	-0.88006
1951	98.6860	63.1620	64.0030	356017.	4819.00	96.8495	1.89619
1952	109.074	64.7280	59.3431	370117.	4811.00	103.705	5.17693
1953	115.752	62.1180	53.6647	384641.	4867.00	111.755	3.57666
1954	120.204	70.9920	59.0596	399519.	4995.00	121.281	-0.88782
1955	132.076	76.7340	58.0983	414368.	5070.00	130.332	1.33772
1956	139.496	82.9980	59.4984	429884.	5127.00	139.439	0.04110
1957	149.884	89.7840	59.9023	446678.	5153.00	148.355	1.03035
1958	161.756	90.8280	56.1512	465687.	5147.00	157.056	2.99234
1959	172.144	95.5260	55.4919	489155.	5080.00	165.065	4.28829
1960	186.242	104.400	56.0560	516451.	5053.00	174.306	6.84795
1961	198.856	108.054	54.3378	544739.	5086.00	185.029	7.47271
1962	201.824	110.664	54.8319	573440.	5134.00	196.228	2.85149
1963	197.372	112.230	56.8621	601810.	5123.00	205.893	-4.13842
1964	198.114	115.362	58.2301	632186.	5138.00	216.360	-8.43302
1965	205.534	121.104	58.9216	661428.	5170.00	227.042	-9.47305
1966	224.084	127.890	57.0723	685430.	5263.00	238.748	-6.14206
1967	235.956	132.066	55.9706	710406.	5282.00	248.234	4.94599
1968	253.022	146.160	57.7657	740489.	5354.00	259.735	-2.58452
1969	270.830	156.078	57.6295	774383.	5415.00	271.115	-0.10514
1970	286.412	157.644	55.0410	814562.	5500.00	283.753	0.93689
1971	300.510	165.474	55.0644	859850.	5552.00	295.532	1.68447
1972	319~060	173.304	54.3171	905109.	5596.00	306.543	4.08335
1973	336.126	182.700	54.3546	954196.	5637.00	317.337	5.92060

F. References

K. Bush (1974): "Soviet Inflation", in Y. Laulan (ed.), Banking, Money and Credit in the USSR, NATO, Brussels.

M. Evans (1969): Macroeconomic Activity, New York.

M. Friedman (1957): The Theory of Consumption Function, Princeton.

G. Garvy (1975): "Inflation and Price Stabilization Policies in Some Eastern European Countries", in Anti-Inflationary Policies: East-West, CESES, Milan. -

K. Gergelyi J. Kolek and I. Sujan (1973): Komplexne prognozy v socialistickom hospodarstve, Alfa, Bratislava.

M.Goldman (1965): "The Reluctant Consumer and Economic Fluctuations in the Soviet Union", in JPE, August 1965, pp.366 - 380. -

D. W. Green, C. I. Higgins (1977): SOVMOD I, Academic Press, New York.

F. Holzman (1960): ,,Soviet Inflationary Pressures 1928 - 1957", Quarterly Journal of Economics, Vol.74, pp.167 - 188.

K. Janacek (1972): Makroekonomicka spotrebni funkce, Ekonomicky ustav CSAV, Prague.

K. Janacek (1972): "Poznamky k pouziti makroekonomickych spotrebnich funkci k prognostickym ucelum", Socialisticky obchod, No.1.

K. Janacek (1975): "An Estimation of the Aggregate Macroeconomic Consumption Function in Czechoslovakia", Czechoslovak Economic Papers, No.15.

J. Kolek, I. Sujan (1975): Ekonometricke modely v socialistickych krajina'ch, Pravda, Bratislava.

O. Kyn, W. Schrettl and J. Slama (1979): "Growth Cycles in Centrally Planned Economies: An Empirical Test", in O. Kyn, W. Schrettl (eds.): On the Stability of Contemporary Economic Systems, Papers and Proceedings of the 3rd Reisensburg Symposium, Vandenhoeck and Ruprecht, Goettingen.

O. Kyn, W Schrettl and V. Vincentz (1975): "On the Simulation of Soviet Economic Growth", in: Forschungsbericht 1974, Osteuropa-Institut Muenchen, Munich.

O. Kyn and L. Kyn (1975): "Factor Productivity in East European Countries", in F.-L. Altmann, O. Kyn, H.-J. Wagener (eds.): On the Measurement of Factor Productivities, Papers and Proceedings of the 2nd Reisensburg Symposium, Goettingen (Vandenhoeck and Ruprecht). -

O. Kyn and L. Kyn, (1976): "Trends in East European Factor Productivity", in: R. Raupach et al. (eds.): Jahrbuch der Wirtschaft Osteuropas, Band 7 (Olzog).

V. Mokry (1971): "Prognoza finalni spotreby obyvatelstva pri pouziti agregatni makroekonomicke spotrebni funkce", Socialisticky obchod, No.6.

R. Portes (1974): Macroeconomic Equilibrium under Central Planning, Institute for International Economic Studies of the University of Stockholm, Seminar Paper, No. 40.

R. Portes (1976): Macroeconomic Equilibrium and Disequilibrium in Centrally Planned Economies, Department of Economics, Birbeck College, Discussion Paper No.45.

R. Portes and D. Winter (1977): "The Supply of Consumer Goods in Centrally Planned Economies", Journal of Comparative Economics, Vol. 1, No. 4.

R. Portes and D. Winter (1978): "The Demand for Money and for Consumption Goods in Centrally Planned Economies", Review of Economics and Statistics, February.

J. Rybackova (1971): "Odhad funkce uspor obyvatelstva v Ceskoslovensku", Politicka' ekonomie, No. 7.

W. Schrettl (1974): "On the Volume of Soviet Investment and Some Implications", in: Forschungsbericht 1974, Osteuropa-Institut Muenchen, Munich.

W. Schrettl (1977): Notes on Planning when Consumption Affects Output, Osteuropa-Institut Muenchen, Munich, Working Paper No.40.

G. Schroeder (1975): "Consumer Goods Availability and Repressed Inflation in the Soviet Union", in Economic Aspects of Life in the USSR, NATO, Brussels. -

I. Sujan (1970): "Spotrebni funkce v komplexnych ekonometrickych modeloch", Ekonomicky casopis, No.7.-

I. Sujan, J. Kolek and K. Gergeleyi (1974): Prognosticky model ekonomiky CSSR, Alfa, Bratislava.

FOOTNOTES

1	For a more detailed discussion of this point, see 0. Kyn, W. Schrettl and J. Slama (1979). (back)
2	D. W. Green and C. Higgins (1977), I. Sujan, J. Kolek and K. Gergelyi (1973/1974). For a survey o£ econometric models of the USSR, Hungary, Poland and the GDR, see J. Kolek and I. Sujan (1975). (back)
3	V. Mokry (1971), 3. Rybackova (1974), K. Janacek (1972, 1975), R. Portes and D. Winter (1977, 1978). (back)
4	It will be assumed for the sake of simplicity that plans are always fulfilled, although it could be interesting in this context to study, how the discrepancy between plans and reality influences planning decisions. (back)
5	Again for the sake of simplicity we exclude the possibility of choosing different techniques. (back)
6	For both sets of data see Appendix (back)
7	Janacek (1972) p.76. (back)
8	Janacek (1972) p.95. (back)
9	F. Holzman (1960), G. Garvy (1975), K. Bush (1974), G. Schroeder to quote only some western views. (back)
10	Janacek (1972) p.77. (back)
11	R. Portes (1977) p.2. (back)
12	In his empirical work Portes proceeded in a similar way (see Portes and Winter [1977] and [1978]), although he has recently (Portes 1976) also developed a theoretical framework for estimating the demand and supply consumption functions in disequilibrium conditions. (back)
13	The average annual consumption and saving ratios are shown in the Appendix (back)
14	Unlike Milton Friedman's permanent income hypothesis we do assume positive correlation between "transitory consumption" and "transitory income". (back)
15	Schrettl (1974) p.87. He attributes this hypothesis to Hutchings, Manove, Thalheim and Zaleski. (back)
16	Schrettl (1974) p.92. (back)
17	Schrettl (1974) p.93. (back)
18	R. Portes and D. Winter (1978). (back)
19	R. Portes and D. Winter (1978) p.363. (back)
20	R. Portes, D. Winter (1978) p.356, They attribute this view to Brown, Neuberger and Holzman and to the participants of the NATO Colloquium of 1975. (back)
21	R. Portes, D. Winter (1978) p.360. (back)
22	W. Schrettl (1977). (back)
23	For the parallel estimates of Investment function see Kyn, Schrettl, Slama,(1979). (back)
24	For the justification of this specification see O. Kyn and L. Kyn (1976) and (1977) (back)
25	The multicollinearity does not allow for economically meaningful direct estimates of all parameters of the production function. (back)