Implications of Food Subsistence for Monetary Policy and Inflation

Author/Editor:

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

Publication Date:

March 17, 2016

Electronic Access:

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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.

Series:

Working Paper No. 16/70

Subject:

English

Publication Date:

March 17, 2016

ISBN/ISSN:

9781475542639/1018-5941

Stock No:

WPIEA2016070

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

62

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