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Economic Quarterly

April 9, 2020

Richmond Fed’s Economic Quarterly Analyzes the Impact of Luxury-Necessity Substitutions

In the latest Richmond Fed Economic Quarterly, economists Andreas Hornstein and Marios Karabarbounis, along with Yongsung Chang of the University of Rochester, measure the impact of substituting luxuries for necessities during economic booms on the “labor-market wedge,” the gap between the real wage and the marginal rate of substitution.

Analyzing data from the Consumer Expenditure Survey, the authors find that luxury-necessity-substitution patterns account for 6 percent to 16 percent of the cyclical volatility of the labor-market wedge.

Also in this issue of Economic Quarterly is “Technology Diffusion: The Case of Internet Banking” by Richard Sullivan and Zhu Wang. Economic Quarterly is a free publication containing economic analysis pertinent to Federal Reserve monetary and banking policy. More information is available at (800) 322-0565 or online.


As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District — including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia — to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.

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