This paper examines the extent to which consumption in Russian households responds to
exogenous income shocks. During the time period studied in this paper (1994 – 1998),
Russia experienced two major economic crises. Both featured extreme movements in the
real ruble-dollar exchange rate. The price of oil, which is typically thought to have a
strong effect on the Russian economy, was also quite volatile during this time period.
This paper exploits these large changes in oil prices and exchange rates, as well as
community-level variations in wage and pension arrears, to identify exogenous shocks to
household income. Using representative panel data on urban households from the
Russian Longitudinal Monitoring Survey, I find that a household which experiences an
exogenous shock of 10% of its total income changes both its food and total non-durable
expenditure by 7-11%. Most evidence indicates that these shocks are transitory in nature
and thus the traditional Life Cycle/Permanent Income Hypothesis model is firmly
rejected as describing the behavior of Russian households. Additional results indicate
that changes in household savings are negatively related to exogenous income shocks,
with this relationship strongest for low wealth households. Only models of consumption
which include precautionary savings motives can explain why poorer households both
reduce their consumption and increase their savings in response to an exogenous decline
in income.