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Food Prices and Inflation Targeting in Emerging Economies

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  • Marc Pourroy

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne)

  • Benjamin Carton

    ()
    (CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)

  • Dramane Coulibaly

    ()
    (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense)

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 bably-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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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00768906.

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Date of creation: Dec 2012
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Handle: RePEc:hal:cesptp:halshs-00768906

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Keywords: Monetary policy; commodities; food prices; DSGE models;

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