World Food Prices and Monetary Policy

64 Pages Posted: 6 Dec 2010

See all articles by Luis A. V. Catão

Luis A. V. Catão

Inter American Development Bank

Roberto Chang

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 2010

Abstract

In recent years, large fluctuations in world food prices have renewed interest in the question of how monetary policy in small open economies should react to imported price shocks. We address this issue in an open economy setting similar to previous ones except that food plays a distinctive role in utility. A key novelty of our model is that the real exchange rate and the terms of trade can move in opposite directions in response to food price shocks. This has several consequences for observables and for policy. Under a variety of model calibrations, broad CPI targeting emerges as welfare-superior to alternative policy rules once the variance of food price shocks is as large as in real world data.

Suggested Citation

Catão, Luis A. V. and Chang, Roberto, World Food Prices and Monetary Policy (December 2010). NBER Working Paper No. w16563. Available at SSRN: https://ssrn.com/abstract=1719924

Luis A. V. Catão (Contact Author)

Inter American Development Bank ( email )

Roberto Chang

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
25
Abstract Views
385
PlumX Metrics