Implications of Food Subsistence for Monetary Policy and Inflation

By Rafael A Portillo, Luis-Felipe Zanna, Stephen A. O'Connell, Richard Peck

March 17, 2016

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Rafael A Portillo, Luis-Felipe Zanna, Stephen A. O'Connell, and Richard Peck. Implications of Food Subsistence for Monetary Policy and Inflation, (USA: International Monetary Fund, 2016) accessed December 30, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We introduce subsistence requirements in food consumption into a simple new-Keynesian model with flexible food and sticky non-food prices. We 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. We derive a welfare-based loss function for the monetary authority and show that optimal policy calls for complete (in some cases nearcomplete) stabilization of sticky-price non-food inflation, despite the presence of a foodsubsistence threshold. Subsistence amplifies the welfare losses of policy mistakes, however, raising the stakes for monetary policy at earlier stages of development.

Subject: Consumer price indexes, Consumption, Food prices, Inflation, Inflation targeting, Monetary policy, National accounts, Prices

Keywords: Africa, Consumer price indexes, Consumption, Food inflation, Food price, Food prices, Headline inflation, Inflation, Inflation targeting, Inflation volatility, Monetary policy, Output correlation, Price of food, Structural Transformation, Subsistence, WP

Publication Details

Pages:

62
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/070
Stock No:

WPIEA2016070
ISBN:

9781475542639
ISSN:

1018-5941

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