DP4843 The Macroeconomics of Subsistence Points
|Author(s):||Morten O Ravn, Stephanie Schmitt-Grohé, Martín Uribe|
|Publication Date:||January 2005|
|Keyword(s):||business cycles, non-homothetic preferences, time-varying markups|
|JEL(s):||D10, D12, D42, E30|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=4843|
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.