Description

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.