Implications of Food Subsistence for Monetary Policy and Inflation

Rafael Portillo, Luis-Felipe Zanna, Stephen O'Connell and Richard Peck

No 2016/070, IMF Working Papers from International Monetary Fund

Abstract: We introduce subsistence requirements in food consumption into a simple new-Keynesian model with flexible food and sticky non-food prices. We study how the endogenous structural transformation that results from subsistence affects the dynamics of the economy, the design of monetary policy, and the properties of inflation at different levels of development. A calibrated version of the model encompasses both rich and poor countries and broadly replicates the properties of inflation across the development spectrum, including the dominant role played by changes in the relative price of food in poor countries. We derive a welfare-based loss function for the monetary authority and show that optimal policy calls for complete (in some cases nearcomplete) stabilization of sticky-price non-food inflation, despite the presence of a foodsubsistence threshold. Subsistence amplifies the welfare losses of policy mistakes, however, raising the stakes for monetary policy at earlier stages of development.

Keywords: WP; headline inflation; monetary policy; Structural Transformation; Inflation; Subsistence; food inflation; food price; inflation volatility; price of food; output correlation; Food prices; Consumption; Inflation targeting; Consumer price indexes; Africa (search for similar items in EconPapers)
Pages: 62
Date: 2016-03-17
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Citations: View citations in EconPapers (8)

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