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Food prices and inflation targeting in emerging economies

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  • Pourroy, Marc
  • Carton, Benjamin
  • Coulibaly, Dramane

Abstract

The two episodes of food price surges in 2007 and 2011 followed by a drop in 2014 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 investigate the optimal monetary policy that manages food price shocks. To this end, we develop a new-Keynesian small open-economy model that incorporates world food price shocks. We show that the optimal monetary policy depends on country income level. In low and medium income countries, overall consumer price targeting is optimal, while in high-income countries non-food inflation targeting is the best option. This result holds not only because food represents a significant share in total consumption in low and medium income countries, but also because of food good composition. 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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  • Pourroy, Marc & Carton, Benjamin & Coulibaly, Dramane, 2016. "Food prices and inflation targeting in emerging economies," International Economics, Elsevier, vol. 146(C), pages 108-140.
  • Handle: RePEc:eee:inteco:v:146:y:2016:i:c:p:108-140
    DOI: 10.1016/j.inteco.2015.12.001
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    Cited by:

    1. Ginn, William & Pourroy, Marc, 2022. "The contribution of food subsidy policy to monetary policy in India," Economic Modelling, Elsevier, vol. 113(C).
    2. Choudary Ihtasham Ali & Sami Ullah & Umar Ijaz Ahmed & Irfan Ahmad Baig & Muhammad Arqam Iqbal & Amjad Masood, 2022. "Can Food Inflation Be Stabilized By Monetary Policy? A Quantile Regression Approach," Journal of Economic Impact, Science Impact Publishers, vol. 4(3), pages 205-212.
    3. Bhattacharya. Rudrani, 2017. "Effectiveness of monetary policy in stabilising food inflation: Evidence from advanced and emerging economies," Working Papers 17/209, National Institute of Public Finance and Policy.
    4. William Ginn & Marc Pourroy, 2022. "The Contribution of Food Subsidy Policy to Monetary Policy in India," Working Papers hal-02944209, HAL.
    5. Simranjeet Kaur, 2023. "A Decade of Impact of Monetary Policy on Food Inflation: An Overview and Future Direction," Vision, , vol. 27(4), pages 498-509, August.
    6. Tule, Moses K. & Salisu, Afees A. & Chiemeke, Charles C., 2019. "Can agricultural commodity prices predict Nigeria's inflation?," Journal of Commodity Markets, Elsevier, vol. 16(C).
    7. Patnaik, Ila & Pandey, Radhika, 2020. "Moving to Inflation Targeting," Working Papers 20/316, National Institute of Public Finance and Policy.
    8. Gilles Dufrénot & William Ginn & Marc Pourroy, 2023. "ENSO Climate Patterns on Global Economic Conditions," AMSE Working Papers 2308, Aix-Marseille School of Economics, France.
    9. Ginn, William & Pourroy, Marc, 2019. "Optimal monetary policy in the presence of food price subsidies," Economic Modelling, Elsevier, vol. 81(C), pages 551-575.
    10. Chikashi Tsuji, 2016. "Dynamic Relations of Consumer Prices: A Case Study of Recent Effects on the Japanese Headline CPI," Journal of Social Science Studies, Macrothink Institute, vol. 3(2), pages 28-39, July.
    11. Howard, Peter & Sterner, Thomas, 2014. "Raising the Temperature on Food Prices: Climate Change, Food Security, and the Social Cost of Carbon," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170648, Agricultural and Applied Economics Association.
    12. Ginn, William & Pourroy, Marc, 2020. "Should a central bank react to food inflation? Evidence from an estimated model for Chile," Economic Modelling, Elsevier, vol. 90(C), pages 221-234.
    13. Bhattacharya, Rudrani & Jain, Richa, 2020. "Can monetary policy stabilise food inflation? Evidence from advanced and emerging economies," Economic Modelling, Elsevier, vol. 89(C), pages 122-141.
    14. Abdul-Aziz Iddrisu & Imhotep Paul Alagidede, 2021. "Asymmetry in food price responses to monetary policy: a quantile regression approach," SN Business & Economics, Springer, vol. 1(3), pages 1-25, March.
    15. Iddrisu, Abdul-Aziz & Alagidede, Imhotep Paul, 2020. "Monetary policy and food inflation in South Africa: A quantile regression analysis," Food Policy, Elsevier, vol. 91(C).
    16. Johnbosco Chukwuma Ozigbu, 2023. "Responsiveness of Headline Inflation to the Dynamics of Monetary Aggregates in Nigeria: A Structural Vector Autoregressive (SVAR) Approach," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(9), pages 1701-1711, September.
    17. Bhattacharya, Rudrani, 2016. "How does Supply Chain Distortion affect Food Inflation in India?," Working Papers 16/173, National Institute of Public Finance and Policy.
    18. Nahiyan Faisal Azad & Apostolos Serletis, 2020. "Monetary policy spillovers in emerging economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(4), pages 664-683, October.
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    20. Górajski, Mariusz & Kuchta, Zbigniew & Leszczyńska-Paczesna, Agnieszka, 2023. "Price-setting heterogeneity and robust monetary policy in a two-sector DSGE model of a small open economy," Economic Modelling, Elsevier, vol. 122(C).

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    More about this item

    Keywords

    Monetary policy; Commodities; Food prices; DSGE models;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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