The Welfare Consequences of Income-Induced Expenditure Switching

Rudolfs Bems and Julian di Giovanni

AEA Papers and Proceedings, 2018, vol. 108, 547-51

Abstract: Bems and di Giovanni (2016) establish that income-induced expenditure switching (IIES) from foreign goods to cheaper domestic substitutes played a significant role in external rebalancing during the 2008–2009 financial crisis in Latvia. In this paper, we examine the welfare consequences of IIES under different external sector rebalancing scenarios. We find that IIES reduced the negative welfare consequences that accompany external rebalancing by between 12–17 percent. We also show, using a historical decomposition, that IIES accounted for 18 percent of the 2008–2009 collapse in imports, which is greater than the 14 percent contribution due to the conventional price-induced expenditure switching channel.

JEL-codes: F14 F32 G01 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/pandp.20181069
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