Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/249175 
Year of Publication: 
2021
Series/Report no.: 
SAFE Working Paper No. 332
Publisher: 
Leibniz Institute for Financial Research SAFE, Frankfurt a. M.
Abstract: 
This paper studies the consumption response to an increase in the domestic value of foreign currency household debt during a large depreciation. We use detailed consumption survey data that follows households for four years around Hungary's 2008 currency crisis. We find that, relative to similar local currency debtors, foreign currency debtors reduce consumption approximately one-for-one with increased debt service, suggesting a role for liquidity constraints. We document a variety of margins of adjustment to the shock. Foreign currency debtors reduce both the quantity and quality of expenditures, consistent with nonhomothetic preferences and "flight from quality." We find no effect on overall household labor supply, consistent with a weak wealth effect on labor supply. However, a small subset of households adjusts labor supply toward foreign income streams. Affected households also boost home pro- duction, suggesting a shift in consumption from money-intensive to time-intensive goods.
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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