The Foreign Currency Fisher Channel: Evidence from Households

This paper studies how households adjust consumption and labor supply to a large revaluation of foreign currency-denominated household debt. Our analysis uses detailed household-level data during Hungary’s large depreciation in 2008. Relative to similar local currency debtors, foreign currency debtors reduce consumption expenditures one-for-one with increased debt service, consistent with a foreign currency Fisher channel of the depreciation. Foreign currency debtors reduce both the quantity and quality of expenditures, consistent with a “flight from quality.” Debt revaluation does not affect overall labor supply, but there is a small adjustment toward foreign income streams and a substantial increase in home production.