Food, Fuel, and Facts: Distributional Effects of Global Price Shocks

Saroj Bhattarai, Arpita Chatterjee and Gautham Udupa

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Exogenous global commodity price shocks lead to a significant decline over time in Indian household consumption. These negative effects are heterogeneous along the income distribution: households in lower income groups experience more adverse consumption effects following an exogenous rise in food prices, whereas households in the lowest and the two highest income groups are affected similarly following an exogenous rise in oil prices. We investigate how income and relative price changes contribute to generating these heterogeneous effects. Global food price shocks lead to significant negative wage income effects that mirror the pattern of negative consumption effects along the income distribution. Both global oil and food price shocks pass-through to local consumer prices in India and increase the relative prices of fuel and food respectively. Expenditure share of food increases with such a rise in relative prices, which provides unambiguous evidence for non-homothetic preferences. Using the expenditure share responses together with theory, we show that food, compared to fuel, is a necessary consumption good for all income groups.

Keywords: global price shocks; food prices; oil prices; inequality; household heterogeneity; household consumption; necessary good; non-homotheticity; India (search for similar items in EconPapers)
JEL-codes: F41 F62 O11 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2024-06
New Economics Papers: this item is included in nep-agr, nep-ene and nep-opm
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Working Paper: Food, Fuel, and Facts: Distributional Effects of Global Price Shocks (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2024-45

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