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Food Prices and Inflation Targeting in Emerging Economies

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  • Marc Pourroy
  • Benjamin Carton
  • Dramane Coulibaly

Abstract

The two episodes of food price surges in 2007 and 2011 have been particularly challenging for developing and emerging economies’ central banks and have raised the question of how monetary authorities should react to such external relative price shocks. We develop a new-Keynesian small open-economy model and show that non-food inflation is a good proxy for core inflation in high-income countries, but not for middle-income and low-income countries. Although, in these countries we find that associating non-food inflation and core inflation may be promoting badly-designed policies, and consequently central banks should target headline inflation rather than non-food inflation. This result holds because non-tradable food represents a significant share in total consumption. Indeed, the poorer the country, the higher the share of purely domestic food in consumption and the more detrimental lack of attention to the evolution in food prices.

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Bibliographic Info

Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2013-7.

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Length: 32 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:drm:wpaper:2013-7

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Keywords: Monetary Policy; Commodities; Food prices; DSGE models;

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