Discussion Paper Details

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Title: The Macroeconomics of Subsistence Points

Author(s): Morten O Ravn, Stephanie Schmitt-Grohé and Martín Uribe

Publication Date: January 2005

Keyword(s): business cycles, non-homothetic preferences and time-varying markups

Programme Area(s): International Macroeconomics

Abstract: This paper explores the macroeconomic consequences of preferences displaying a subsistence point. It departs from the existing related literature by assuming that subsistence points are specific to each variety of goods rather than to the composite consumption good. We show that this simple feature makes the price elasticity of demand for individual goods procyclical. As a result, markups behave countercyclically in equilibrium. This implication is in line with the available empirical evidence.

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Bibliographic Reference

Ravn, M, Schmitt-Grohé, S and Uribe, M. 2005. 'The Macroeconomics of Subsistence Points'. London, Centre for Economic Policy Research.