This paper studies the consumption response to an increase in the domestic value of
foreign currency household debt during a currency crisis. 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 expenditure one-for-one with increased debt service, suggesting a role for liquidity
constraints. One-third of the spending decline is driven by substitution to lower-priced
items within product categories, consistent with nonhomothetic preferences. Affected
households also increase home production, suggesting a shift in consumption from money-intensive to time-intensive goods.