Crisis and Consumption Smoothing
44 Pages Posted: 15 Jun 2009
Date Written: June 15, 2009
Abstract
The dramatic impact of the current crisis on performance of businesses across sectors and economies have been headlining the business press for the past many months. Interestingly, the impact of the crisis across categories of goods/services and across economies reveals several interesting patterns. Extant reconciliations of these patterns in the popular press rely on ad-hoc reasoning. Using historical data on currency crisis episodes across the world, this paper shows that the observed patterns in the impact of a crisis across classes of goods and economies are a consequence of active smoothing of consumption expenditures by consumers.
The results reveal that consumer behavior in a crisis is characterized by consumption smoothing at various levels - inter-temporal, inter-category and intra-category. In sum, these behavioral adjustments result in significant reallocation of consumption expenditures. More importantly, the smoothing decisions due to a crisis are distinct and independent of the impact of changes in income and prices that accompany a crisis. Interestingly, there is marked variation in the patterns of consumption smoothing across different types of economies. Taken together, these results have important and interesting implications for managers, policy makers and academics.
Keywords: Crisis, Consumption Smoothing, Consumer Expenditures, Currency Crisis, Category Share
JEL Classification: F31, M31, M38, F34
Suggested Citation: Suggested Citation
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