Farms, Fertiliser, and Financial Frictions: Yields from a DSGE Model

Sébastien Walker

No 2017/112, IMF Working Papers from International Monetary Fund

Abstract: This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model with a financial accelerator which captures key features of low-income countries (LICs). The predominance of supply shocks in LICs poses distinct challenges for policymakers, given the negative correlation between inflation and the output gap in the case of supply shocks. Our results suggest that: (1) in the face of a supply-side shock, the most desirable interest rate rule involves simply targeting current inflation and smoothing the policy interest rate; and (2) ignoring financial frictions when evaluating policy rules can be particularly problematic in LICs, where financial frictions loom especially large.

Keywords: WP; production function; Monetary policy; Africa; financial frictions; foreign capital flows; DSGE models; supply shocks; world fertiliser price shock; Calvo price-stickiness parameter; rate of return; auditing cost; price inflation; factor price; nominal interest rate; price of fertiliser; fertiliser cost; world cost; expected return; Inflation; Output gap; Exchange rates; Sub-Saharan Africa (search for similar items in EconPapers)
Pages: 52
Date: 2017-05-05
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