World Food Prices and Monetary Policy

Luis Catão () and Roberto Chang

No 16563, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E5 E6 F41 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-agr, nep-cba, nep-mac and nep-mon
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

Published as Catão, Luis A.V. & Chang, Roberto, 2015. "World food prices and monetary policy," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 69-88.

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Journal Article: World food prices and monetary policy (2015)
Working Paper: World Food Prices and Monetary Policy (2010)
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