Implications of Food Subsistence for Monetary Policy and Inflation

63 Pages Posted: 27 Sep 2016

See all articles by Rafael Portillo

Rafael Portillo

International Monetary Fund (IMF)

Luis-Felipe Zanna

International Monetary Fund (IMF)

Stephen A. O'Connell

Swarthmore College - Economics Department; University of Oxford - Centre for Study of African Economics

Richard Peck

Innovations for Poverty Action

Date Written: March 2016

Abstract

We introduce subsistence requirements in food consumption into a simple new-Keynesianmodel with flexible food and sticky non-food prices. We study how the endogenous structuraltransformation that results from subsistence affects the dynamics of the economy, the design ofmonetary policy, and the properties of inflation at different levels of development. A calibratedversion of the model encompasses both rich and poor countries and broadly replicates theproperties of inflation across the development spectrum, including the dominant role played bychanges in the relative price of food in poor countries. We derive a welfare-based loss functionfor 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 foodsubsistencethreshold. Subsistence amplifies the welfare losses of policy mistakes, however,raising the stakes for monetary policy at earlier stages of development.

Keywords: Structural Transformation, Monetary Policy, Inflation, Subsistence.

JEL Classification: E50, O23, O41, O55

Suggested Citation

Portillo, Rafael and Zanna, Luis-Felipe and O'Connell, Stephen A. and Peck, Richard, Implications of Food Subsistence for Monetary Policy and Inflation (March 2016). IMF Working Paper No. 16/70. Available at SSRN: https://ssrn.com/abstract=2844127

Rafael Portillo (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Luis-Felipe Zanna

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Stephen A. O'Connell

Swarthmore College - Economics Department ( email )

Swarthmore, PA 19081
United States
610-328-8107 (Phone)
610-328-7352 (Fax)

HOME PAGE: http://www.swarthmore.edu/SocSci/soconne1/

University of Oxford - Centre for Study of African Economics

Wellington Square
Oxford OX1 3JP
United Kingdom

Richard Peck

Innovations for Poverty Action ( email )

1731 Connecticut Ave, 4th floor
New Haven, CT 20009
United States

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