The Welfare Consequences of Income-Induced Expenditure Switching

摘要

The Great Financial Crisis led to a reversal of external imbalances in the European periphery countries (the so-called GUPS), as well as in the Baltic states (Estonia, Latvia, and Lithuania). One crucial difference underlying the experiences of these countries relative to previous sudden stop episodes was the lack of exchange rate flexibility-in the case of the GUPS, the euro bound these countries' hands, while the Baltic states chose to maintain currency pegs to the euro throughout the crisis. Therefore, in contrast to large devaluation episodes, price adjustments played a limited role in external adjustment. Instead, these reversals were mainly driven via a fall in countries' incomes and the resulting contractions in imports (e.g., see Kang and Shambaugh 2014; Eichenbaum, Rebelo, and de Resende 2016).In Bems and di Giovanni (2016), we exploit a unique scanner-level dataset for a major Latvian retailer to study expenditure switching at the micro level over the 2006-2011 period. We show that the income collapse during the 2008-2009crisis impacted adjustment via two channels: (i) a proportional reduction in imports, and (ii) income-induced expenditure switching (IIES). While channel (i) is standard, the focus on channel (ii) is novel in that we allow for non-homothetic preferences in consumers' consumption demand. This channel allows consumers to substitute toward lower priced goods given a fall in income. If lower priced goods in turn tend to be domestic rather than foreign (as is the case in Latvia and other emerging markets), consumers will disproportionately switch their consumption from foreign goods to domestic substitutes in the face of an income contraction during crises.