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Should a central bank react to food inflation? Evidence from an estimated model for Chile

Author

Listed:
  • William Ginn
  • Marc Pourroy

    (CRIEF [Poitiers] - Centre de recherche sur l'intégration économique et financière [EA 2249] - UP - Université de Poitiers = University of Poitiers, Axe 2 (2017-2021) : "Vulnérabilités et risques" (MSHS Poitiers) - MSHS de Poitiers [Maison des sciences de l'homme et de la société de Poitiers] - Maison des sciences humaines et sociales de Poitiers [USR 3565] - UP - Université de Poitiers = University of Poitiers - CNRS - Centre National de la Recherche Scientifique)

Abstract

We examine whether food price shocks are a major source of macroeconomic fluctuations. We estimate a small open economy DSGE model using an alternative Taylor rule applied to Chilean data. The empirical evidence suggests that food inflation played a non-trivial role in shaping Chile's de facto monetary policy actions. Consistent with its commitment to price stability, the central bank increases the policy rate in reaction to food inflation. Despite an immediate monetary policy reaction to a food price shock, the policy rate gradually tapers off. This is due to a second-round effect on non-food inflation propagated by the food price shock. A main finding is that monetary policy that targets headline inflation is welfare improving.

Suggested Citation

  • William Ginn & Marc Pourroy, 2020. "Should a central bank react to food inflation? Evidence from an estimated model for Chile," Post-Print hal-03579680, HAL.
    • Handle: RePEc:hal:journl:hal-03579680
    DOI: 10.1016/j.econmod.2020.05.011
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    Cited by:

    1. Sami, Janesh & Makun, Keshmeer, 2024. "Food inflation and monetary policy in emerging economies," Journal of Asian Economics, Elsevier, vol. 95(C).
    2. Ginn, William & Pourroy, Marc, 2022. "The contribution of food subsidy policy to monetary policy in India," Economic Modelling, Elsevier, vol. 113(C).
    3. Ginn, William, 2024. "The paradox of fossil fuel subsidies," Economic Analysis and Policy, Elsevier, vol. 83(C), pages 333-358.
    4. Ma, Kai & Zhao, Lei, 2024. "The impact of new energy transportation means on China's food import," Research in Transportation Economics, Elsevier, vol. 103(C).
    5. William Ginn & Marc Pourroy, 2022. "The Contribution of Food Subsidy Policy to Monetary Policy in India," Working Papers hal-02944209, HAL.
    6. Helder Ferreira de Mendonça & Natália Ferreira Trigo, 2024. "What is the effect of imported inflation and central bank credibility on the poor and rich?," Applied Economics, Taylor & Francis Journals, vol. 56(21), pages 2520-2543, May.
    7. 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).

    More about this item

    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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