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MACROECONOMICS OF SUBSISTENCE POINTS

Published online by Cambridge University Press:  01 April 2008

MORTEN O. RAVN ,
STEPHANIE SCHMITT-GROHÉ  and
MARTÍN URIBE
MORTEN O. RAVN*
Affiliation:
European University Institute and CEPR
STEPHANIE SCHMITT-GROHÉ
Affiliation:
Duke University CEPR and NSER
MARTÍN URIBE
Affiliation:
Duke University and NBER
*
Address correspondence to: Morten O. Ravn, Department of Economics, European University Institute, Villa San Paolo, Via della Pizzola 43, Florence 50133, Italy; e-mail: [email protected].
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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

Nonhomothetic PreferencesTime-Varying MarkupsBusiness Cycles
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Supplement S1: Dynamic Macroeconomic Theory , April 2008 , pp. 136 - 147
Copyright
Copyright © Cambridge University Press 2008

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