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Monetary Policy in Sub-Saharan Africa$
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Andrew Berg and Rafael Portillo

Print publication date: 2018

Print ISBN-13: 9780198785811

Published to Oxford Scholarship Online: April 2018

DOI: 10.1093/oso/9780198785811.001.0001

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Implications of Food Subsistence for Monetary Policy and Inflation

Implications of Food Subsistence for Monetary Policy and Inflation

(p.186) Chapter 11 Implications of Food Subsistence for Monetary Policy and Inflation
Monetary Policy in Sub-Saharan Africa

Rafael Portillo

Luis-Felipe Zanna

Stephen O’Connell

Richard Peck

Oxford University Press

The chapter introduces subsistence requirements in food consumption into a simple New Keynesian model with flexible food and sticky non-food prices. It shows 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. The authors 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.

Keywords:   Subsistence, food prices, monetary policy, inflation, low-income countries, developing countries, structural transformation, sub-Saharan Africa

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