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The Macroeconomics of Subsistence Points

  • Morten O. Ravn
  • Stephanie Schmitt-Grohe
  • Martin Uribe

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.

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File URL: http://www.nber.org/papers/w11012.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11012.

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Date of creation: Dec 2004
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Publication status: published as Ravn, Morten, Stephanie Schmitt-Grohe and Martin Uribe. “The Macroeconomics of Subsistence Points.” Macroe-conomic Dynamics 12 (2008): 136-147.
Handle: RePEc:nbr:nberwo:11012
Note: EFG
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  1. Atkeson, A. & Ogaki, M., 1991. "Wealth-Varying Intertemporal Elasticities of Substitution Evidence from Panel and Aggregate Data," RCER Working Papers 303, University of Rochester - Center for Economic Research (RCER).
  2. Galí, Jordi & López-Salido, J David & Vallés Liberal, Javier, 2005. "Understanding the Effects of Government Spending on Consumption," CEPR Discussion Papers 5212, C.E.P.R. Discussion Papers.
  3. Kiminori Matsuyama, 2000. "The Rise of Mass Consumption Societies," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 23, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  4. Julio J. Rotemberg & Michael Woodford, 1989. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," NBER Working Papers 3206, National Bureau of Economic Research, Inc.
  5. Steger, Thomas M., 2000. "Economic growth with subsistence consumption," Journal of Development Economics, Elsevier, vol. 62(2), pages 343-361, August.
  6. Morten O. Ravn & Stephanie Schmitt-Grohe, 2004. "Deep Habits," 2004 Meeting Papers 208, Society for Economic Dynamics.
  7. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
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