The consumer response to the Mexican peso crisis

As a result of the forced devaluation of the peson on 20 December 1994, Mexico faced its worst economic crisis since the Great Depression. Over this period, household expenditure fell by 15%. The present study investigates the extent to which changes in the composition of consumption acted as an adjustment mechanism for households. Precrisis data are used to fit an Engel curve for each consumption item. The change in relative prices and total expenditure experienced by households during the Mexican peso crisis is employed to predict crisis-period expenditure shares. Analysis shows that households reduced their expenditures on semidurables to allocate a relatively higher share of their budget to basic foods. Through this smoothing mechanism, households maintained levels of basic staples with the continued fall of overall expenditures.