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Income-Induced Expenditure Switching

Listed author(s):
  • Rudolfs Bems
  • Julian di Giovanni

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.

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File URL: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/922.pdf
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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 922.

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Date of creation: Sep 2016
Handle: RePEc:bge:wpaper:922
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