Income-Induced Expenditure Switching
American Economic Review
vol. 106,
no. 12, December 2016
(pp. 3898-3931)
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.Citation
Bems, Rudolfs, and Julian di Giovanni. 2016. "Income-Induced Expenditure Switching." American Economic Review, 106 (12): 3898-3931. DOI: 10.1257/aer.20160251Additional Materials
JEL Classification
- E21 Macroeconomics: Consumption; Saving; Wealth
- F14 Empirical Studies of Trade
- F31 Foreign Exchange
- F32 Current Account Adjustment; Short-Term Capital Movements
- I11 Analysis of Health Care Markets
- L81 Retail and Wholesale Trade; e-Commerce