Money Demand and Quantity Constraints: Evidence from the Soviet Interview Project

I. INTRODUCTION There are more than 500 studies of money demand that use time-series or pooled data but less than twenty studies that use cross-section data. Time-series studies use a limited number of aggregate variables, such as income and wealth. Cross-section studies supplement income and wealth with socioeconomic and demographic variables to provide insights that cannot be detected in aggregate data. Most studies of money demand are for capitalist countries. Only a few studies exist for socialist countries. There are no cross-section studies of the demand for money for socialist countries due to lack of data. Population censuses of the former Soviet Union did not provide information on household money and wealth (Pickersgill [1970] and Millar [1987]). However, the Soviet Interview Project (SIP) survey conducted in 1983 provides a large cross-section data set of former Soviet citizens. SIP is a retrospective survey of 2793 former Soviet citizens who left the Soviet Union for the United States during the late 1970s and early 1980s. The SIP survey asked respondents about their last normal period of life in the Soviet Union. For most respondents this was in the late 1970s, a period of normal functioning of the administrative-command system. SIP provides a rich database of conventional variables, and includes information on rationing (EIAR) variables and other Soviet-specific variables. EIAR variables measure shortages, participation in the underground economy, and access to privileges. We examine the effects of EIAR factors on the demand for money in addition to conventional variables to obtain a picture of money demand near the end of the administrative-command era. This paper makes two contributions. It is the first to examine the demand for money in a centrally planned economy using cross-section data which tests variables other than income and interest rates. Second, this study empirically investigates the effects of income on the marginal utility of income under rationing by studying how quantity-constrained respondents may use trade in convertible foreign currencies or barter when income increases, thereby lessening money's role as the medium of exchange. The ongoing transformation of the former Soviet Union to a market economy and political pluralism is not an easy process. For policymakers, the findings of this study of the behavior of households may be useful in setting monetary policies (see also Collier and Mokhtari [1989], Ofer and Vinokur [1992], Mokhtari and Gregory [1993], and Mokhtari and Asgary [1993]). Policymakers must know the responses of households to changes in quantity constraints, underground economic activity, and privileges, and to other factors during the transition period and beyond. Moreover, our findings may be useful for researchers who investigate the behavioral differences in the money demand of households in two different economic systems. II. PAST RESEARCH In the administrative-command economy, money is held for transaction and precautionary purposes. Private capital markets are absent; investment decisions are made by the government. Money serves as a medium of exchange, and income should be the prime determinant of the demand for money. Under these conditions, money should be a necessity, and the income elasticity of demand for money should be positive and less than or equal to one. Other than income, we would expect the demand for money in the Soviet Union to have different determinants than in capitalist countries. First, capital markets are absent; the interest rate is not the opportunity cost of money. Second, consumer good shortages (quantity constraints) should affect the transaction and the precautionary demand for money.(1) Households may substitute money for goods to be able to purchase goods in the future at state prices, purchase goods from the underground economy at higher prices, or reduce their labor supply (Barro and Grossman [1971; 1974; 1976]). …