Income-Induced Expenditure Switching

Rudolfs Bems and Julian di Giovanni

No 9887, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper shows that an income effect can drive expenditure switching between domestic and foreign goods. We use a unique Latvian scanner-level dataset for food and beverages, covering the 2008-09 financial crisis, to study (i) relative price movements, and (ii) expenditure switching between domestic and imported goods. We document several empirical findings. First, imports contracted by 26%, with expenditure switching accounting for one third of the fall, while the relative price of foreign goods viz. the food CPI increased by 4.4% during the crisis. Second, the majority of the switching took place between items within narrowly defined product groups, while the relative price adjustment was across product groups. This puzzling asymmetry in expenditure and price adjustments, combined with a finding that consumers substituted towards lower unit value domestic items during the crisis, motivate us to model non-homothetic consumer demand. Over the crisis period, the estimated model explains eighty percent of the observed expenditure switching, which was driven almost entirely by an income effect.

Keywords: Crisis; Expenditure switching; Non-homothetic preferences; Relative price adjustment (search for similar items in EconPapers)
JEL-codes: F1 F3 F4 (search for similar items in EconPapers)
Date: 2014-03
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Citations: View citations in EconPapers (5)

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