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The Macroeconomics of Subsistence Points

Author

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

Suggested Citation

  • Morten O. Ravn & Stephanie Schmitt-Grohe & Martin Uribe, 2004. "The Macroeconomics of Subsistence Points," NBER Working Papers 11012, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11012
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    References listed on IDEAS

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    1. Kiminori Matsuyama, 2002. "The Rise of Mass Consumption Societies," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1035-1070, October.
    2. Atkeson, Andrew & Ogaki, Masao, 1996. "Wealth-varying intertemporal elasticities of substitution: Evidence from panel and aggregate data," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 507-534, December.
    3. Morten Ravn & Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Deep Habits," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 195-218.
    4. Jordi Galí & J. David López-Salido & Javier Vallés, 2007. "Understanding the Effects of Government Spending on Consumption," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 227-270, March.
    5. Steger, Thomas M., 2000. "Economic growth with subsistence consumption," Journal of Development Economics, Elsevier, vol. 62(2), pages 343-361, August.
    6. 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, Oxford University Press, vol. 117(4), pages 1329-1368.
    7. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
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    Cited by:

    1. Rahul Anand & Eswar S. Prasad, 2010. "Optimal Price Indices for Targeting Inflation Under Incomplete Markets," NBER Working Papers 16290, National Bureau of Economic Research, Inc.
    2. Bokan, Nikola & Hughes Hallett, Andrew, 2007. "The Impact of Tax, Product and Labour Market Distortions on the Phillips Curve and the Natural Rate of Unemployment," Economics Discussion Papers 2007-42, Kiel Institute for the World Economy (IfW).
    3. Bokan, Nikola & Hughes Hallett, Andrew, 2008. "The Impact of Tax and Market Distortions on the Phillips Curve and the Natural Rate of Unemployment," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 2, pages 1-28.
    4. Mohammad R. Jahan‐Parvar & Xuan Liu & Philip Rothman, 2013. "Equity Returns and Business Cycles in Small Open Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1117-1146, September.

    More about this item

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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