Implications Of Food Subsistence For Monetary Policy And Inflation

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Oxford Economic Papers


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.


O41, One Two and Multisector Growth Models, E52, Monetary Policy, O55, Africa, O23, Fiscal and Monetary Policy in Development


Another version of this work is freely available as Working Paper No. 16/70 in the IMF Working Papers series.

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