THE WILLIAM DAVIDSON INSTITUTE AT THE UNIVERSITY OF MICHIGAN BUSINESS SCHOOL CPI Bias and Real Living Standards in Russia During the Transition

The economies of the former Soviet Bloc experienced large declines in output during the decade of transition which began with the collapse of the Soviet Union in 1991. Yet there are many reasons to believe that measured output and official deflators provide a poor proxy for the change in real living standards in transition economies. This paper uses the Engel curve methodology recently developed by Hamilton (2001) and Costa (2001) to examine changes in real living standards in Russia during the transition period and to provide an estimate of how much the official Russian CPI has overstated consumer inflation. We also examine changes in consumer durables, home production, and subjective well-being to further evaluate changes in living standards. Our findings indicate that CPI bias has caused a substantial understatement of the growth performance of the Russian economy during the transition. Even just allowing household final consumption to be deflated with bias, we find that the level of real per capita GDP in 2001 may be understated by up to thirty percent compared with using a bias-corrected deflator. Our analysis of consumer durables, home production, and subjective well-being supports the conclusion that the decline in living standards has been substantially less than what is inferred by looking at official statistics on real output. Acknowledgements: We are grateful for assistance from Olga Antimonova, John Bryant, Geua Boe-Gibson, Daniel Berkowitz, and Konstantin Gluschenko and to helpful comments from Betsy Brainerd, Valery Lazarev, Tom Mroz, and seminar audiences at Canterbury, Cornell, Duke, Michigan, Williams and the Northeast Universities Development Consortium Conference. JEL: C43, E31, O12, P36