WP 2022/1- Győző Gyöngyösi- Judit Rariga -Emil Verner: The Anatomy of Consumption in a Household Foreign Currency Debt Crisis

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 production, suggesting a shift in consumption from money-intensive to time-intensive
goods.

JEL: E21, G51 .

Keywords: Household debt, foreign currency debt, consumption.