World Food Prices and Monetary Policy

Author/Editor:

Roberto Chang ; Luis Catão

Publication Date:

July 1, 2010

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:

The large swings in world food prices in recent years renew interest in the question of how monetary policy in small open economies should react to such imported price shocks. We examine this issue in a canonical open economy setting with sticky prices and where food plays a distinctive role in utility. We show how world food price shocks affect natural output and other aggregates, and derive a second order approximation to welfare. Numerical calibrations show broad CPI targeting to be welfare-superior to alternative policy rules once the variance of food price shocks is sufficiently large as in real world data.

Series:

Working Paper No. 10/161

Subject:

English

Publication Date:

July 1, 2010

ISBN/ISSN:

9781455201440/1018-5941

Stock No:

WPIEA2010161

Format:

Paper

Pages:

66

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