Working Paper: NBER ID: w11012
Authors: Morten O. Ravn; Stephanie Schmitt-Grohé; Martin 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: No keywords provided
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) | price elasticity of demand (D12) |
| price elasticity of demand (D12) | markups (D43) |
| aggregate demand (E00) | price elasticity of demand (D12) |
| price elasticity of demand (D12) | markups (during recessions) (E32) |
| price elasticity of demand (D12) | markups (during economic expansions) (E32) |