Food, Fuel, and Facts: Distributional Effects of Global Price Shocks

72 Pages Posted: 30 May 2024

See all articles by Saroj Bhattarai

Saroj Bhattarai

University of Texas at Austin - Department of Economics

Arpita Chatterjee

UNSW Business School

Gautham Udupa

CAFRAL

Date Written: April 30, 2024

Abstract

Exogenous global commodity price shocks lead to a significant decline over time in Indian household consumption. These negative effects are heterogeneous along the income distribution: households in lower income groups experience more adverse consumption effects following an exogenous rise in food prices, whereas households in the lowest and the two highest income groups are affected similarly following an exogenous rise in oil prices. We investigate how income and relative price changes contribute to generating these heterogeneous effects. Global food price shocks lead to significant negative wage income effects that mirror the pattern of negative consumption effects along the income distribution. Both global oil and food price shocks pass-through to local consumer prices in India and increase the relative prices of fuel and food respectively. Expenditure share of food increases with such a rise in relative prices, which provides unambiguous evidence for nonhomothetic preferences. Using the expenditure share responses together with theory, we show that food, compared to fuel, is a necessary consumption good for all income groups.

Keywords: Food prices, Oil prices, Inequality, Household heterogeneity, Household consumption, Necessary good, Non-homotheticity, India

JEL Classification: F41, F62, O11

Suggested Citation

Bhattarai, Saroj and Chatterjee, Arpita and Udupa, Gautham, Food, Fuel, and Facts: Distributional Effects of Global Price Shocks (April 30, 2024). UNSW Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4847442 or http://dx.doi.org/10.2139/ssrn.4847442

Saroj Bhattarai

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Arpita Chatterjee (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Gautham Udupa

CAFRAL ( email )

C-8, 8th Floor, Reserve Bank of India
Bandra-Kurla Complex, Bandra (East)
Mumbai, Maharashtra 400051
India

HOME PAGE: http://https://sites.google.com/site/gautamudupa/home

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