The Macroeconomics of Subsistence Points

18 Pages Posted: 5 May 2005

See all articles by Morten O. Ravn

Morten O. Ravn

European University Institute - Economics Department (ECO); London Business School - Department of Economics; University of Southampton; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Stephanie Schmitt-Grohé

Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: January 2005

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.

Keywords: Non-homothetic preferences, time-varying markups, business cycles

JEL Classification: D10, D12, D42, E30

Suggested Citation

Ravn, Morten O. and Schmitt-Grohe, Stephanie and Uribe, Martin, The Macroeconomics of Subsistence Points (January 2005). Available at SSRN: https://ssrn.com/abstract=717564

Morten O. Ravn (Contact Author)

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Stephanie Schmitt-Grohe

Centre for Economic Policy Research (CEPR) ( email )

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Martin Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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