Working Paper: CEPR ID: DP17054
Authors: Raphael Auer; Ariel Tomas Burstein; Sarah Lein; Jonathan Vogel
Abstract: What are the unequal effects of changes in consumer prices on the cost of living? In the context of changes in import prices (driven by, e.g., changes in trade costs or exchange rates), most analyses focus on variation across households in initial expenditure shares on imported goods. However, the unequal welfare effects of non-marginal foreign price changes also depend on differences in how consumers substitute between imported and domestic goods, on which there is scant evidence. Using data from Switzerland surrounding the 2015 appreciation of the Swiss franc, we provide evidence that lower income households have higher price elasticities. These differences in elasticities contribute significantly to the unequal welfare effects of large import price changes.
Keywords: expenditure switching; inequality; nonhomothetic preferences
JEL Codes: F1; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower-income households (R20) | higher price elasticities (D11) |
| higher price elasticities (D11) | unequal welfare effects of import price shocks (F61) |
| income levels (J31) | price elasticity of demand for imported goods (F14) |
| elasticity of substitution varies across income levels (D11) | welfare gap between income groups (I32) |
| dispersion of price changes across goods (E30) | welfare disparities (I39) |