Implications of Food Subsistence for Monetary Policy and Inflation
This study introduces subsistence requirements in food consumption into a model with flexible food and sticky non-food prices
Abstract
The authors introduce subsistence requirements in food consumption into a simple new-Keynesian model with flexible food and sticky non-food prices. They study how the endogenous structural transformation that results from subsistence affects the dynamics of the economy, the design of monetary policy, and the properties of inflation at different levels of development. A calibrated version of the model encompasses both rich and poor countries and broadly replicates the properties of inflation across the development spectrum, including the dominant role played by changes in the relative price of food in poor countries. They derive a welfare-based loss function for the monetary authority and show that optimal policy calls for complete (in some cases near complete) stabilization of sticky-price non-food inflation, despite the presence of a food subsistence threshold. Subsistence amplifies the welfare losses of policy mistakes, however, raising the stakes for monetary policy at earlier stages of development.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
Citation
Rafael Portillo ; Luis-Felipe Zanna ; Stephen A. O’Connell ; Richard Peck (2016) Implications of Food Subsistence for Monetary Policy and Inflation. IMF Working Paper No. 16/70
Links
Implications of Food Subsistence for Monetary Policy and Inflation