Unequal Expenditure Switching: Evidence from Switzerland

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.

Heterogeneous Agent Trade

“…Sangani ( 2022) is a recent paper that provides evidence in support of this fact from the Kilts-Nielsen data set. The evidence in Auer et al (2022) most closely relates to the patterns in Figure 1a with poorer households having higher price elasticities; Colicev et al (2022) finds similar results.…”

“…Borusyak and Jaravel (2021) (following an approach dating back to at least Deaton (1989)) considers an environment where, to a first order, only exposure matters, similar to the exposure term in Equation ( 39). Auer et al (2022) work out second order effects with non-homothetic CES preferences, and additional effects from elasticities show up, similarly to the elasticity term in (39). Here both are present.…”

“…Fajgelbaum and Khandelwal (2016), Cravino and Levchenko (2017), Carroll and Hur (2020), Borusyak and Jaravel (2021), Jaccard (2023) are recent examples that measure heterogeneity in import exposure. Auer et al (2022) and Colicev et al (2022) go a step further by measuring heterogeneity in price sensitivity across the income distribution, and this type of evidence is very much the launching point for my paper.…”

“…This procedure works well, and thus the model is able to match spatial distribution of economic activity in the data just as well as standard, constant elasticity gravity models. In addition, I ensure that the model replicates salient facts regarding household-level expenditure patterns (Borusyak and Jaravel (2021)), elasticities (Auer et al (2022)), and marginal propensities to consume (Kaplan and Violante (2022)).…”

On the Distributional Effects of International Tariffs

“…show that this high risk of an extreme disruption in earnings can generate wealth inequality close to that in the data by pushing the precautionary savings motive into the right tail.14 The skill-specific productivity values and transition matrices are provided in Appendix A.1.15 The literature has yet to reach a consensus on whether the (expenditure) gains from trade are pro-poor or prorich. For example, whereasCravino and Levchenko (2017) andCarroll and Hur (2020) document that tradable expenditure shares are decreasing in income in Mexico and the United States, respectively,Borusyak and Jaravel (2021) andAuer et al (2022) find that import shares are not decreasing in income in the United States and Switzerland, respectively. Importantly, though, we focus on the expenditure share of tradables because trade can have a broad impact on the price of all tradable goods and services through increased competition, as shown in Jaravel and Sager (2019) andFlaaen et al (2020), or through input-output linkages.…”