IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/16563.html
   My bibliography  Save this paper

World Food Prices and Monetary Policy

Author

Listed:
  • Luis Catão
  • Roberto Chang

Abstract

In recent years, large fluctuations in world food prices have renewed interest in the question of how monetary policy in small open economies should react to imported price shocks. We address this issue in an open economy setting similar to previous ones except that food plays a distinctive role in utility. A key novelty of our model is that the real exchange rate and the terms of trade can move in opposite directions in response to food price shocks. This has several consequences for observables and for policy. Under a variety of model calibrations, broad CPI targeting emerges as welfare-superior to alternative policy rules once the variance of food price shocks is as large as in real world data.

Suggested Citation

  • Luis Catão & Roberto Chang, 2010. "World Food Prices and Monetary Policy," NBER Working Papers 16563, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16563
    Note: IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w16563.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. David S. Jacks & Kevin H. O'Rourke & Jeffrey G. Williamson, 2011. "Commodity Price Volatility and World Market Integration since 1700," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 800-813, August.
    2. Sam Schulhofer-Wohl, 2011. "Heterogeneity and Tests of Risk Sharing," Journal of Political Economy, University of Chicago Press, vol. 119(5), pages 925-958.
    3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September.
    4. Bodenstein, Martin & Erceg, Christopher J. & Guerrieri, Luca, 2008. "Optimal monetary policy with distinct core and headline inflation rates," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 18-33, October.
    5. Ester Faia & Tommaso Monacelli, 2008. "Optimal Monetary Policy in a Small Open Economy with Home Bias," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 721-750, June.
    6. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2010. "Optimal Monetary Policy in Open Economies," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.),Handbook of Monetary Economics, edition 1, volume 3, chapter 16, pages 861-933, Elsevier.
    7. Benigno, Gianluca & Benigno, Pierpaolo, 2006. "Designing targeting rules for international monetary policy cooperation," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 473-506, April.
    8. De Paoli, Bianca, 2009. "Monetary policy and welfare in a small open economy," Journal of International Economics, Elsevier, vol. 77(1), pages 11-22, February.
    9. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
    10. Jens Sondergaard & Pietro Cova, 2004. "When Should Monetary Policy Target The Exchange Rate?," Royal Economic Society Annual Conference 2004 51, Royal Economic Society.
    11. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    12. Benigno, Pierpaolo & Woodford, Michael, 2012. "Linear-quadratic approximation of optimal policy problems," Journal of Economic Theory, Elsevier, vol. 147(1), pages 1-42.
    13. Rose, Andrew K., 2007. "A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 663-681, September.
    14. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January.
    15. Sutherland, Alan, 2005. "Incomplete pass-through and the welfare effects of exchange rate variability," Journal of International Economics, Elsevier, vol. 65(2), pages 375-399, March.
    16. Chang, Roberto, 1998. "Credible Monetary Policy in an Infinite Horizon Model: Recursive Approaches," Journal of Economic Theory, Elsevier, vol. 81(2), pages 431-461, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Should food prices influence monetary policy?
      by Economic Logician in Economic Logic on 2011-01-17 21:16:00

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gelos, Gaston & Ustyugova, Yulia, 2017. "Inflation responses to commodity price shocks – How and why do countries differ?," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 28-47.
    2. Alberola, Enrique & Benigno, Gianluca, 2017. "Revisiting the commodity curse: A financial perspective," Journal of International Economics, Elsevier, vol. 108(S1), pages 87-106.
    3. Erten Bilge & Tuzcuoglu Kerem, 2018. "Output Effects of Global Food Commodity Shocks," Journal of Globalization and Development, De Gruyter, vol. 9(1), pages 1-18, June.
    4. Plante, Michael, 2014. "The long-run macroeconomic impacts of fuel subsidies," Journal of Development Economics, Elsevier, vol. 107(C), pages 129-143.
    5. Siami-Namini, Sima & Hudson, Darren & Trindade, A. Alexandre & Lyford, Conrad, 2018. "Commodity Prices, Monetary Policy and the Taylor Rule," 2018 Annual Meeting, February 2-6, 2018, Jacksonville, Florida 266719, Southern Agricultural Economics Association.
    6. García, Carlos J. & Mejía, Jesisbé, 2018. "Macroeconomic stabilization of primary commodities price cycles in developing economies," Journal of Policy Modeling, Elsevier, vol. 40(5), pages 1050-1066.
    7. Anand, Rahul & Prasad, Eswar S. & Zhang, Boyang, 2015. "What measure of inflation should a developing country central bank target?," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 102-116.
    8. Monacelli, Tommaso, 2012. "Is Monetary Policy in an Open Economy Fundamentally Different?," CEPR Discussion Papers 9087, C.E.P.R. Discussion Papers.
    9. Tommaso Monacelli, 2013. "Is Monetary Policy in an Open Economy Fundamentally Different?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(1), pages 6-21, April.
    10. Rafael A Portillo & Luis-Felipe Zanna, 2015. "On the First-Round Effects of International Food Price Shocks; the Role of the Asset Market Structure," IMF Working Papers 15/33, International Monetary Fund.
    11. 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.
    12. 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.
    13. William Ginn & Marc Pourroy, 2020. "The Contribution of Food Subsidy Policy to Monetary Policy," Working Papers hal-02944209, HAL.
    14. Dixon, Huw & Franklin, Jeremy & Millard, Stephen, 2014. "Sectoral shocks and monetary policy in the United Kingdom," Bank of England working papers 499, Bank of England.
    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. Luis Catão & Roberto Chang, 2013. "Monetary Rules for Commodity Traders," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(1), pages 52-91, April.
    17. Andrew Filardo & Marco Jacopo Lombardi, 2014. "Has Asian emerging market monetary policy been too procyclical when responding to swings in commodity prices?," BIS Papers chapters, in: Bank for International Settlements (ed.),Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 129-153, Bank for International Settlements.
    18. Paolo Pesenti, 2013. "Theoretical notes on commodity prices and monetary policy," BIS Papers chapters, in: Bank for International Settlements (ed.),Globalisation and inflation dynamics in Asia and the Pacific, volume 70, pages 79-90, Bank for International Settlements.
    19. Ginn, William & Pourroy, Marc, 2019. "Optimal monetary policy in the presence of food price subsidies," Economic Modelling, Elsevier, vol. 81(C), pages 551-575.
    20. Joao Ribeiro, 2019. "Inflación de alimentos en Perú: El rol de la política monetaria," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 34(2), pages 81-98, October.
    21. 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.
    22. Plante, Michael, 2014. "The long-run macroeconomic impacts of fuel subsidies," Journal of Development Economics, Elsevier, vol. 107(C), pages 129-143.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Luis Catão & Roberto Chang, 2013. "Monetary Rules for Commodity Traders," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(1), pages 52-91, April.
    2. Staveley-O’Carroll, James & Staveley-O’Carroll, Olena M., 2018. "Exchange rate targeting in the presence of foreign debt obligations," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 113-134.
    3. De Paoli, Bianca, 2009. "Monetary policy and welfare in a small open economy," Journal of International Economics, Elsevier, vol. 77(1), pages 11-22, February.
    4. Lombardo, Giovanni & Ravenna, Federico, 2014. "Openness and optimal monetary policy," Journal of International Economics, Elsevier, vol. 93(1), pages 153-172.
    5. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2010. "Optimal Monetary Policy in Open Economies," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.),Handbook of Monetary Economics, edition 1, volume 3, chapter 16, pages 861-933, Elsevier.
    6. Wei, Shang-Jin & Xie, Yinxi, 2020. "Monetary policy in an era of global supply chains," Journal of International Economics, Elsevier, vol. 124(C).
    7. Luis Catão & Roberto Chang, 2013. "World Food Prices, the Terms of Trade-Real Exchange Rate Nexus, and Monetary Policy," IMF Working Papers 13/114, International Monetary Fund.
    8. Roberto Chang, 2015. "Monetary Policy Under Commodity Price Fluctuations," Review of Development Economics, Wiley Blackwell, vol. 19(2), pages 282-296, May.
    9. Jordi Galí & Tommaso Monacelli, 2016. "Understanding the Gains from Wage Flexibility: The Exchange Rate Connection," American Economic Review, American Economic Association, vol. 106(12), pages 3829-3868, December.
    10. Fujiwara, Ippei & Wang, Jiao, 2017. "Optimal monetary policy in open economies revisited," Journal of International Economics, Elsevier, vol. 108(C), pages 300-314.
    11. Drago Bergholt, 2014. "Monetary Policy in Oil Exporting Economies," Working Papers No 5/2014, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    12. Forlati, Chiara, 2015. "On the benefits of a monetary union: Does it pay to be bigger?," Journal of International Economics, Elsevier, vol. 97(2), pages 448-463.
    13. Mykhaylova, Olena, 2010. "Optimal Monetary Policy with Non-Zero Net Foreign Wealth," MPRA Paper 23598, University Library of Munich, Germany.
    14. Mikhail Dmitriev & Jonathan Hoddenbagh, 2019. "Optimal Monetary Policy in Small Open Economies: Producer Currency Pricing," Working Papers wp2019_10_01, Department of Economics, Florida State University.
    15. Yongseung Jung, 2010. "Asset Market Structures and Monetary Policy in a Small Open Economy," Macroeconomics Working Papers 22811, East Asian Bureau of Economic Research.
    16. Bianca De Paoli, 2009. "Monetary Policy under Alternative Asset Market Structures: The Case of a Small Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(7), pages 1301-1330, October.
    17. Ester Faia & Tommaso Monacelli, 2008. "Optimal Monetary Policy in a Small Open Economy with Home Bias," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 721-750, June.
    18. Benigno, Pierpaolo & Woodford, Michael, 2012. "Linear-quadratic approximation of optimal policy problems," Journal of Economic Theory, Elsevier, vol. 147(1), pages 1-42.
    19. Gianluca Benigno & Bianca De Paoli, 2010. "On the International Dimension of Fiscal Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1523-1542, December.
    20. Fujiwara, Ippei & Teranishi, Yuki, 2017. "Financial frictions and policy cooperation: A case with monopolistic banking and staggered loan contracts," Journal of International Economics, Elsevier, vol. 104(C), pages 19-43.

    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Economic Logic blog

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:16563. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.