Implications of Food Subsistence for Monetary Policy and Inflation
IMF Working Papers, March 17, 2016
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Bibliographic details
- Authors: Rafael A Portillo, Luis-Felipe Zanna, Stephen A. O'Connell, Richard Peck
- Published: March 17, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475542639.001
Authors and publication
- By Rafael A Portillo, Luis-Felipe Zanna, Stephen A. O'Connell, Richard Peck
- March 17, 2016
- IMF Working Papers 2016, 070 (2016)
- Pages: 62
- Volume: 2016
- Issue: 070
- Series: Working Paper No. 2016/070
- DOI: https://doi.org/10.5089/9781475542639.001
- Stock No: WPIEA2016070
- ISBN: 9781475542639
- ISSN: 1018-5941
Research question and model setup
- Introduces subsistence requirements in food consumption into a simple new-Keynesian model.
- Prices: food prices are flexible; non-food prices are sticky.
- Focus: how endogenous structural transformation from subsistence affects:
- macroeconomic dynamics,
- design of monetary policy,
- properties of inflation across development levels.
Calibration and scope
- Calibrated model encompasses both rich and poor countries.
- Broadly replicates properties of inflation across the development spectrum.
- Emphasizes the dominant role of changes in the relative price of food in poor countries.
Key findings
- Optimal monetary policy, derived from a welfare-based loss function for the monetary authority, calls for complete (in some cases nearcomplete) stabilization of sticky-price non-food inflation, despite the presence of a food-subsistence threshold.
- Subsistence amplifies the welfare losses of policy mistakes, raising the stakes for monetary policy at earlier stages of development.
- The model accounts for the prominent influence of food relative prices on inflation dynamics in poorer economies.
Policy implications
- Monetary authorities should prioritize stabilization of sticky-price non-food inflation even when food subsistence constraints exist.
- Greater caution and precision in policy are warranted at earlier stages of development because subsistence magnifies welfare costs of policy errors.
Subject tags and keywords (as provided)
- 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
Implications of Food Subsistence for Monetary Policy and Inflation, IMF Working Paper No. 2016/070