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Market Incompleteness, Consumption Heterogeneity and Commodity Price Shocks

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  • Damian Romero

Abstract

This paper studies how household heterogeneity shapes the response to commodity price shocks. Using data from Chile and other emerging economies, we document that (i) low/high-income households spend relatively more on food/services, and (ii) more than 40 percent of the population is financially constrained. We build a multi-sector New Keynesian model for a small open economy with household heterogeneity and non-homothetic preferences. Non-homothetic preferences dampen the effect of a commodity price shock by inducing a reallocation in the consumption basket towards more income-elastic goods: an economy with non-homothetic preferences generates aggregate responses 29 percent lower.

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  • Damian Romero, 2022. "Market Incompleteness, Consumption Heterogeneity and Commodity Price Shocks," Working Papers Central Bank of Chile 950, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:950
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