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Food Prices and Inflation Targeting in Emerging Economies

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  • Marc Pourroy
  • Benjamin Carton
  • Dramane Coulibaly

Abstract

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.

Suggested Citation

  • Marc Pourroy & Benjamin Carton & Dramane Coulibaly, 2012. "Food Prices and Inflation Targeting in Emerging Economies," Working Papers 2012-33, CEPII research center.
  • Handle: RePEc:cii:cepidt:2012-33
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    3. Ginn, William & Pourroy, Marc, 2022. "The contribution of food subsidy policy to monetary policy in India," Economic Modelling, Elsevier, vol. 113(C).
    4. 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.
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    6. 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.
    7. 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.
    8. 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.
    9. William Ginn & Marc Pourroy, 2022. "The Contribution of Food Subsidy Policy to Monetary Policy in India," Working Papers hal-02944209, HAL.
    10. 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).
    11. 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.
    12. 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.
    13. Bhattacharya, Rudrani, 2016. "How does Supply Chain Distortion affect Food Inflation in India?," Working Papers 16/173, National Institute of Public Finance and Policy.
    14. 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).
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    16. Patnaik, Ila & Pandey, Radhika, 2020. "Moving to Inflation Targeting," Working Papers 20/316, National Institute of Public Finance and Policy.
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    19. Misati, Roseline Nyakerario & Munene, Olive, 2015. "Second Round Effects And Pass-Through Of Food Prices To Inflation In Kenya," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 3(3), pages 1-13, July.
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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
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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