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Global food prices and monetary policy in an emerging market economy: The case of India

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  • Holtemöller, Oliver
  • Mallick, Sushanta

Abstract

This paper investigates a perception in the political debates as to what extent poor countries are affected by price movements in the global commodity markets. To test this perception, we use the case of India to establish in a standard SVAR model that global food prices influence aggregate prices and food prices in India. To further analyze these empirical results, we specify a small open economy New-Keynesian model including oil and food prices and estimate it using observed data over the period 1996Q2 to 2013Q2 by applying Bayesian estimation techniques. The results suggest that a big part of the variation in inflation in India is due to cost-push shocks and, mainly during the years 2008 and 2010, also to global food price shocks, after having controlled for exogenous rainfall shocks. We conclude that the inflationary supply shocks (cost-push, oil price, domestic food price and global food price shocks) are important contributors to inflation in India. Since the monetary authority responds to these supply shocks with a higher interest rate which tends to slow growth, this raises concerns about how such output losses can be prevented by reducing exposure to commodity price shocks.

Suggested Citation

  • Holtemöller, Oliver & Mallick, Sushanta, 2016. "Global food prices and monetary policy in an emerging market economy: The case of India," Journal of Asian Economics, Elsevier, vol. 46(C), pages 56-70.
  • Handle: RePEc:eee:asieco:v:46:y:2016:i:c:p:56-70
    DOI: 10.1016/j.asieco.2016.08.005
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    Cited by:

    1. Caporale, Guglielmo Maria & Helmi, Mohamad Husam & Çatık, Abdurrahman Nazif & Menla Ali, Faek & Akdeniz, Coşkun, 2018. "Monetary policy rules in emerging countries: Is there an augmented nonlinear taylor rule?," Economic Modelling, Elsevier, vol. 72(C), pages 306-319.
    2. repec:rjr:romjef:v::y:2018:i:1:p:5-19 is not listed on IDEAS
    3. Szafranek, Karol, 2017. "Flattening of the New Keynesian Phillips curve: Evidence for an emerging, small open economy," Economic Modelling, Elsevier, vol. 63(C), pages 334-348.
    4. repec:eee:eneeco:v:71:y:2018:i:c:p:14-34 is not listed on IDEAS
    5. repec:eee:ecmode:v:67:y:2017:i:c:p:261-274 is not listed on IDEAS
    6. Aminu, Nasir & Meenagh, David & Minford, Patrick, 2018. "The role of energy prices in the Great Recession — A two-sector model with unfiltered data," Energy Economics, Elsevier, vol. 71(C), pages 14-34.

    More about this item

    Keywords

    Commodity prices; Food prices; New-Keynesian macroeconometric model; Inflation; India; Structural vector autoregressive model;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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