Paper #1534

Title:

Income-Induced expenditure switching

Authors:

Rudolfs Bems and Julian di Giovanni

Date:

August 2016

Abstract:

This paper shows that an income effect can drive expenditure switching between domestic and imported goods. We use a unique Latvian scanner-level dataset, covering the 2008-09 crisis, to document several empirical findings. First, expenditure switching accounted for one-third of the fall in imports, and took place within narrowly-defined product groups. Second, there was no corresponding within-group change in relative prices. Third, consumers substituted from expensive imports to cheaper domestic alternatives. These findings motivate us to estimate a model of non-homothetic consumer demand, which explains two-thirds of the observed expenditure switching. Estimated switching is driven by income, not changes in relative prices.

Keywords:

Expenditure switching; relative price adjustment; crisis; income effect.

JEL codes:

F1; F3; F4

Area of Research:

Macroeconomics and International Economics

Published in:

American Economic Review, Vol. 106, No. 12, December 2016 (pp. 3898-3931)

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