Working Paper: NBER ID: w29757
Authors: Raphael Auer; Ariel Burstein; Sarah M. 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. We quantify the contribution of heterogeneous elasticities for the unequal welfare effects of observed price changes between 2014–15 and for counterfactual shocks to the mean and dispersion of import price changes.
Keywords: Consumer Prices; Welfare Effects; Income Elasticities
JEL Codes: E3; F1; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in import prices due to the appreciation of the Swiss franc (F31) | Welfare effects across households at different income levels (H31) |
| Lower-income households have higher price elasticities compared to higher-income households (D12) | Unequal welfare effects from price changes (D69) |
| Uniform increase in import prices (F14) | Welfare of households with lower incomes falls by one-third less than for households with higher incomes (H31) |
| Differences in price elasticities (D11) | Differences in welfare across the income distribution in response to observed price changes (D69) |