Income-Induced Expenditure Switching

Recognition Program

Authors: Rudolfs Bems and Julian di Giovanni

American Economic Review, Vol. 106, No 12, 3898-3931, December, 2016

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 2008-09 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 non-homothetic consumer demand, which explains two-thirds of the observed expenditure switching. Estimated switching is driven by income, not changes in relative prices.

This paper originally appeared as Barcelona GSE Working Paper 922
This paper is acknowledged by the Barcelona GSE Research Recognition Program