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Implications of food subsistence for monetary policy and inflation

Author

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  • Rafael Portillo
  • Luis-Felipe Zanna
  • Stephen O’Connell
  • Richard Peck
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 near-complete) stabilization of sticky-price non-food inflation, despite the presence of a food-subsistence threshold. Subsistence amplifies the welfare losses of policy mistakes, however, raising the stakes for monetary policy at earlier stages of development.

Suggested Citation

  • Rafael Portillo & Luis-Felipe Zanna & Stephen O’Connell & Richard Peck, 2016. "Implications of food subsistence for monetary policy and inflation," Oxford Economic Papers, Oxford University Press, vol. 68(3), pages 782-810.
    • Handle: RePEc:oup:oxecpp:v:68:y:2016:i:3:p:782-810.
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    File URL: http://hdl.handle.net/10.1093/oep/gpw017
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    2. William Ginn & Marc Pourroy, 2022. "The Contribution of Food Subsidy Policy to Monetary Policy in India," Working Papers hal-02944209, HAL.
    3. Neyer, Ulrike & Stempel, Daniel, 2022. "How should central banks react to household inflation heterogeneity?," DICE Discussion Papers 378, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    4. Mr. Giovanni Melina & Mr. Rafael A Portillo, 2018. "Economic Fluctuations in Sub-Saharan Africa," IMF Working Papers 2018/040, International Monetary Fund.
    5. Fahim Al Marhubi, 2021. "Economic Complexity and Inflation: An Empirical Analysis," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 49(3), pages 259-271, September.
    6. Stempel, Daniel & Neyer, Ulrike, 2022. "Should Central Banks Consider Household Inflation Heterogeneity?," VfS Annual Conference 2022 (Basel): Big Data in Economics 264053, Verein für Socialpolitik / German Economic Association.
    7. Blanco, Cesar & Diz, Sebastian, 2021. "Optimal monetary policy with non-homothetic preferences," MPRA Paper 107427, University Library of Munich, Germany.

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