 World food prices and monetary policyLuis Catão () and Roberto Chang Journal of Monetary Economics, 2015, vol. 75, issue C, 69-88 Abstract: How should monetary policy respond to large fluctuations in world food prices? We study this question in an open economy model in which imported food has a larger weight in domestic consumption than abroad and international risk sharing can be imperfect. A key novelty is that the real exchange rate and the terms of trade can move in opposite directions in response to world food price shocks. This exacerbates the policy trade-off between stabilizing output prices vis a vis the real exchange rate, to an extent that depends on risk sharing and the price elasticity of exports. We characterize implications for dynamics, optimal monetary policy, and the relative performance of practical monetary rules. While CPI targeting and expected CPI targeting can dominate PPI targeting if international risk sharing is perfect, even seemingly mild departures from the latter make PPI targeting a winner. Keywords: Monetary policy; Small open economy; Real exchange rates; Terms of trade (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:75:y:2015:i:c:p:69-88 DOI: 10.1016/j.jmoneco.2014.12.010 Access Statistics for this article Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser More articles in Journal of Monetary Economics from Elsevier |
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