Crisis and consumption smoothing

Abstract

The dramatic impact of the current crisis on performance of businesses across sectors and economies has been headlining the business press for the past several months. Extant reconciliations of these patterns in the popular press rely on ad hoc reasoning. Using historical data on currency crisis episodes across the world, we show that the impact of the crisis on a firm's business is best understood by focusing on the impact of the crisis on the behavior of consumers. Our analyses show that consumer behavior in a crisis is characterized by consumption smoothing at various levels-intertemporal, intercategory, and intracategory. These behavioral adjustments result in significant reallocation of consumption expenditures. More importantly, the smoothing decisions because of 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. ©2011 INFORMS.