Food inflation and macroeconomic dynamics in the US: Evidence from an estimated DSGE model

Xiaoke Zhu and Xiaohua Yu

Finance Research Letters, 2025, vol. 75, issue C

Abstract: This study aims to investigate whether and how food inflation influences U.S. macroeconomic dynamics. To this end, we develop and estimate a heterogeneous dynamic stochastic general equilibrium (DSGE) model incorporating both the food and non-food sectors. Calibration and Bayesian estimation methods are employed to derive the key parameters involved in this model. Our analysis reveals that key macroeconomic variables exhibit significant nonlinear responses to food price shocks. Notably, a quarter of headline inflation can be attributed to food inflation in the post-pandemic era. Furthermore, a higher labor substitution parameter and lower consumption substitution elasticity amplify the economic recession. In response to food price shocks, moderate monetary policies can mitigate declines in real GDP and consumption but potentially exacerbate inflation.

Keywords: Food inflation; Macroeconomic dynamics; New Keynesian; Uncertainty; Post-pandemic period (search for similar items in EconPapers)
JEL-codes: E12 E31 Q18 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:75:y:2025:i:c:s154461232500159x

DOI: 10.1016/j.frl.2025.106895

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