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Food Prices and Inflation Targeting in Emerging Economies

  • Marc Pourroy
  • Benjamin Carton
  • Dramane Coulibaly

The two episodes of food price surges in 2007 and 2011 have raised the question of how monetary authorities should react to such external relative price shocks. These inflation shocks have been particularly challenging for developing and emerging economies’ central banks who have adopted inflation targeting strategies during the last decade. We develop a new-Keynesian small open-economy model that distinguishes three price indexes: an overall consumer prices index, the exact index of core inflation based on sticky prices, and a proxy for the core inflation index based on non-food prices. We show that nonfood 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 goods represent a significant share in total consumption. Indeed, the poorer the country, the higher the share of purely domestic food goods in consumption and the more detrimental lack of attention to the evolution in food prices.

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Paper provided by CEPII research center in its series Working Papers with number 2012-33.

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Date of creation: Nov 2012
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Handle: RePEc:cii:cepidt:2012-33
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