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World Food Prices and Monetary Policy

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  • Luis Catão
  • Roberto Chang

Abstract

In recent years, large fluctuations in world food prices have renewed interest in the question of how monetary policy in small open economies should react to imported price shocks. We address this issue in an open economy setting similar to previous ones except that food plays a distinctive role in utility. A key novelty of our model is that the real exchange rate and the terms of trade can move in opposite directions in response to food price shocks. This has several consequences for observables and for policy. Under a variety of model calibrations, broad CPI targeting emerges as welfare-superior to alternative policy rules once the variance of food price shocks is as large as in real world data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16563.

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Date of creation: Dec 2010
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Handle: RePEc:nbr:nberwo:16563

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  1. Bianca De Paoli, 2004. "Monetary policy and welfare in a small open economy," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19950, London School of Economics and Political Science, LSE Library.
  2. Stephanie Schmitt-Grohé & Martín Uribe, 2007. "Optimal simple and implementable monetary and fiscal rules," Working Paper, Federal Reserve Bank of Atlanta 2007-24, Federal Reserve Bank of Atlanta.
  3. David S. Jacks, Kevin H. O'Rourke and Jeffrey G. Williamson, 2009. "Commodity Price Volatility and World Market Integration since 1700," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp280, IIIS.
  4. Jordi Galí & Tommaso Monacelli, 2004. "Monetary policy and exchange rate volatility in a small open economy," Economics Working Papers 835, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," NBER Technical Working Papers 0282, National Bureau of Economic Research, Inc.
  6. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, American Economic Association, vol. 99(3), pages 1053-69, June.
  7. Rose, Andrew K., 2007. "A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(5), pages 663-681, September.
  8. Bodenstein, Martin & Erceg, Christopher J. & Guerrieri, Luca, 2008. "Optimal monetary policy with distinct core and headline inflation rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(Supplemen), pages S18-S33, October.
  9. Sutherland, Alan, 2005. "Incomplete pass-through and the welfare effects of exchange rate variability," Journal of International Economics, Elsevier, Elsevier, vol. 65(2), pages 375-399, March.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Should food prices influence monetary policy?
    by Economic Logician in Economic Logic on 2011-01-17 15:16:00
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Cited by:
  1. Dixon, Huw & Franklin, Jeremy & Millard, Stephen, 2014. "Sectoral shocks and monetary policy in the United Kingdom," Bank of England working papers 499, Bank of England.
  2. Rahul Anand & Eswar Prasad, 2010. "Optimal Price Indices for Targeting Inflation Under Incomplete Markets," IMF Working Papers 10/200, International Monetary Fund.
  3. Michael Plante Author-X-Name-First: Michael Author-X-Name-Last: Plante, 2013. "TheLong-RunMacroeconomicImpactsofFuelSubsidies," Caepr Working Papers, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington 2013-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  4. Paolo Pesenti, 2013. "Theoretical notes on commodity prices and monetary policy," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation and inflation dynamics in Asia and the Pacific, volume 70, pages 79-90 Bank for International Settlements.
  5. Marc Pourroy & Benjamin Carton & Dramane Coulibaly, 2013. "Food Prices and Inflation Targeting in Emerging Economies," EconomiX Working Papers 2013-7, University of Paris West - Nanterre la Défense, EconomiX.
  6. Patnaik, Ila & Shah, Ajay & Veronese, Giovanni, 2011. "How to measure inflation in India?," Working Papers, National Institute of Public Finance and Policy 11/83, National Institute of Public Finance and Policy.
  7. Luis Cat�o & Roberto Chang, 2013. "Monetary Rules for Commodity Traders," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 61(1), pages 52-91, April.
  8. Marco Airaudo & Luis-Felipe Zanna, 2012. "Equilibrium Determinacy and Inflation Measures for Interest Rate Rules," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 573-592, October.
  9. José de Gregorio, 2012. "Commodity Prices, Monetary Policy and Inflation," Working Papers, University of Chile, Department of Economics wp359, University of Chile, Department of Economics.
  10. Tommaso Monacelli, 2013. "Is Monetary Policy in an Open Economy Fundamentally Different?," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 61(1), pages 6-21, April.
  11. International Monetary Fund, 2012. "Inflation Responses to Commodity Price Shocks," IMF Working Papers 12/225, International Monetary Fund.
  12. Plante, Michael, 2014. "The long-run macroeconomic impacts of fuel subsidies," Journal of Development Economics, Elsevier, Elsevier, vol. 107(C), pages 129-143.
  13. Tommaso Monacelli, 2012. "Is Monetary Policy in an Open Economy Fundamentally Different?," Working Papers 449, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  14. Mario Porqueddu & Fabrizio Venditti, 2012. "Do food commodity prices have asymmetric effects on Euro-Area inflation?," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 878, Bank of Italy, Economic Research and International Relations Area.

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