AEA Papers and Proceedings
ISSN 2574-0768 (Print) | ISSN 2574-0776 (Online)
The Welfare Consequences of Income-Induced Expenditure Switching
AEA Papers and Proceedings
vol. 108,
May 2018
(pp. 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.Citation
Bems, Rudolfs, and Julian Di Giovanni. 2018. "The Welfare Consequences of Income-Induced Expenditure Switching." AEA Papers and Proceedings, 108: 547–51. DOI: 10.1257/pandp.20181069Additional Materials
JEL Classification
- F14 Empirical Studies of Trade
- F32 Current Account Adjustment; Short-term Capital Movements
- G01 Financial Crises