Should a central bank react to food inflation? Evidence from an estimated model for Chile |
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| Institution: | 1. Adidas, Germany;2. University of Poitiers, France;1. Monetary Policy Department, Central Bank of Nigeria, Nigeria;2. Department for Management of Science and Technology Development, Ton Duc Thang University, Ho Chi Minh City, Viet Nam;3. Faculty of Business Administration, Ton Duc Thang University, Ho Chi Minh City, Viet Nam;1. Institute for Six-sector Economy, Fudan University, 220 Handan Road, Shanghai, 200433, China;2. School of Economics, Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai, 200433, China;1. Department of Mathematics, Faculty of Science, Niigata University, Japan;2. Instituto de Estadistica, Pontificia Universidad Católica de Valparaiso, Chile;1. CESS, Oxford and Universidad de Santiago, Chile;2. Central Bank of Chile, Chile |
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| Abstract: | We examine whether food price shocks are a major source of macroeconomic fluctuations. We estimate a small open economy DSGE model using an alternative Taylor rule applied to Chilean data. The empirical evidence suggests that food inflation played a non-trivial role in shaping Chile's de facto monetary policy actions. Consistent with its commitment to price stability, the central bank increases the policy rate in reaction to food inflation. Despite an immediate monetary policy reaction to a food price shock, the policy rate gradually tapers off. This is due to a second-round effect on non-food inflation propagated by the food price shock. A main finding is that monetary policy that targets headline inflation is welfare improving. |
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| Keywords: | Monetary policy Commodities Food prices DSGE model E52 E60 E30 E32 |
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