When to Hit the Panic Button? Impact of Currency Crisis on Consumer Behaviors

Abstract

The promise of emerging and developing economies has created unprecedented interest from businesses in recent times. Yet, the reality of these economies, are levels of volatility that are unheard of in developed markets. For example, there have been 435 currency crises across 195 countries over the period 1960-2006 years. Recent events show that crises are no longer the preserve of developing economies alone. Managers realize that there is little that they can do to influence the likelihood of a crisis. The real challenge for them is managing through the crisis. Unfortunately, there is little by way of academic insight to help them understand the implications of a crisis for their business. The focus of this paper is in highlighting the impact of a currency crisis on consumption in an economy. We find that a crisis reduces both per capita consumption expenditures and per capita retail sales with the effect of the crisis manifesting itself over multiple years. There is little evidence for intertemporal consumption smoothing, especially in developing countries, with consumption declining by more than incomes during a crisis. Further, we show that consumer behavior in response to a crisis is characterized by rich patterns of consumption smoothing across and within different categories of products and services. In fact, the crisis impact on consumption smoothing is distinct and independent of the impact of income and prices on consumption. Additionally, we highlight the remarkable differences in patterns of consumption smoothing across developing and developed economies.