Working Paper: CEPR ID: DP4843
Authors: Morten O. Ravn; Stephanie Schmitt-Groh; MartÃn Uribe
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: business cycles; nonhomothetic preferences; time-varying markups
JEL Codes: D10; D12; D42; E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| goods-specific subsistence points (R22) | procyclical price elasticity of demand (E31) |
| procyclical price elasticity of demand (E31) | countercyclical markups (D43) |
| aggregate demand (qt) rises (E19) | weight on price-elastic component of demand increases (D12) |
| weight on price-elastic component of demand increases (D12) | lower markup (D43) |
| countercyclical markups (D43) | observed responses of wages and consumption to aggregate demand shocks (F62) |