The implication of subsistence consumption for economic welfare

Qian Li; Myungkyu Shim; Yongheng Wen

doi:10.1016/j.econlet.2017.06.038

The implication of subsistence consumption for economic welfare

Qian Li, Myungkyu Shim, Yongheng Wen

Department of Economics

Research output: Contribution to journal › Article › peer-review

1 Citation (Scopus)

Abstract

Using a subsistence consumption-augmented real business cycle model, we show that, for any given exogenous growth rates or parameter values, high initial subsistence levels increase the welfare cost of business cycles. This happens because subsistence consumption increases consumption volatility. Our finding suggests that eliminating economic fluctuations can be more beneficial to less-developed economies in which subsistence consumption is a high fraction of aggregate consumption. However, fast-growing economies exhibit a lower discrepancy of welfare costs between rich and poor countries, a result that also highlights the importance of growth-enhancing policies.

Original language	English
Pages (from-to)	30-33
Number of pages	4
Journal	Economics Letters
Volume	158
DOIs	https://doi.org/10.1016/j.econlet.2017.06.038
Publication status	Published - 2017 Sept

Bibliographical note

Funding Information:
The authors gratefully acknowledge the constructive comments made by the editor, Pierre-Daniel Sarte, and an anonymous referee. The authors thank Yongsung Chang, Sun-Bin Kim, Lei Ning, Choonsung Park, and Hee-Seung Yang for their helpful comments. Yongheng Wen gratefully acknowledges the financial support from SUFE (Graduate Students’ Innovation Fund of SUFE (CXJJ-2015-356)).

Publisher Copyright:
© 2017 Elsevier B.V.

All Science Journal Classification (ASJC) codes

Finance
Economics and Econometrics

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10.1016/j.econlet.2017.06.038

Cite this

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title = "The implication of subsistence consumption for economic welfare",

abstract = "Using a subsistence consumption-augmented real business cycle model, we show that, for any given exogenous growth rates or parameter values, high initial subsistence levels increase the welfare cost of business cycles. This happens because subsistence consumption increases consumption volatility. Our finding suggests that eliminating economic fluctuations can be more beneficial to less-developed economies in which subsistence consumption is a high fraction of aggregate consumption. However, fast-growing economies exhibit a lower discrepancy of welfare costs between rich and poor countries, a result that also highlights the importance of growth-enhancing policies.",

author = "Qian Li and Myungkyu Shim and Yongheng Wen",

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year = "2017",

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doi = "10.1016/j.econlet.2017.06.038",

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AU - Shim, Myungkyu

AU - Wen, Yongheng

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AB - Using a subsistence consumption-augmented real business cycle model, we show that, for any given exogenous growth rates or parameter values, high initial subsistence levels increase the welfare cost of business cycles. This happens because subsistence consumption increases consumption volatility. Our finding suggests that eliminating economic fluctuations can be more beneficial to less-developed economies in which subsistence consumption is a high fraction of aggregate consumption. However, fast-growing economies exhibit a lower discrepancy of welfare costs between rich and poor countries, a result that also highlights the importance of growth-enhancing policies.

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The implication of subsistence consumption for economic welfare

Abstract

Bibliographical note

All Science Journal Classification (ASJC) codes

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