The Welfare Consequences of Income-Induced Expenditure Switching
- (pp. 547-51)
AbstractBems 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.
CitationBems, 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.20181069
- F14 Empirical Studies of Trade
- F32 Current Account Adjustment; Short-term Capital Movements
- G01 Financial Crises