Income-Induced Expenditure Switching

Rudolfs Bems and Julian di Giovanni

American Economic Review, 2016, vol. 106, issue 12, 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.

JEL-codes: E21 F14 F31 F32 I11 L81 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/aer.20160251
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Citations: View citations in EconPapers (17)

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Related works:
Working Paper: Income-Induced Expenditure Switching (2016)
Working Paper: Income-Induced Expenditure Switching (2014)
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