Income-Induced Expenditure Switching
Rudolfs Bems, Julian di Giovanni
American Economic Review · 2016 · Volume 106 · Issue 12
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 2008-2009 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 nonhomothetic consumer demand, which explains two-thirds of the observed expenditure switching. Estimated switching is driven by income, not changes in relative prices.
Keywords
Macroeconomics: Consumption, Saving, Wealth, Empirical Studies of Trade, Foreign Exchange, Current Account Adjustment, Short-Term Capital Movements, Analysis of Health Care Markets, Retail and Wholesale Trade, e-Commerce
Enable JavaScript for citation tools and additional paper interactions.