Food and Fuel Price Volatility. Eswar Prasad

Transcription

1 Moneary Polcy esponses o Food and Fuel Prce Volaly Eswar Prasad Cornell Unversy, Brookngs Insuon and NBE

2 Presenaon draws on: Jon work wh ahul Anand (IMF: Opmal Prce Indces for Targeng Inflaon under Incomplee Markes, NBE Workng Paper No ehnkng Cenral Bankng : Sep. 20 epor of Commee on Inernaonal Economc and Polcy eform

3 Movaon Low and sable nflaon s a key objecve of moneary polcy Choosng approprae prce ndex mporan operaonal ssue n mplemenng any verson of moneary polcy Operaonal ssues I do no look a: Level of nflaon Pon vs. band arge

4 elaed leraure Targeng core (excl. food and energy prces s opmal I s a suable measure of nflaon (Wynne, 999 Food and energy shocks are supply shocks, so no moneary nervenon s requred (Mshkn, 2007,2008 Theorecal Bass Goodfrend and Kng g( (997 Aok (200 Major assumpon - complee markes Prce sckness s he only dsoron

5 Bu... Markes are far from complee Consumers are cred consraned Unable o smooh consumpon over me Campbell and Mankw (989, 990, 99; Fuhrer (2000; Muscaell e. al (2003

6 Share of populaon wh access o formal fnance Percen wh Advanced Percen wh Emergng Markes access Economes access Argenna 28 Belgum 97 Brazl 43 Canada 96 Chle 60 Denmark 99 Chna 42 France 96 Egyp 4 Germany 97 Inda 48 Ialy 75 Indonesa 40 Neherlands 00 Iran 3 Span 95 Korea 63 Sweden 99 Malaysa 60 Swzerland 88 Mexco 25 Uned Kngdom 9 Souh Afrca 46 Uned Saes 9 Average 44 Average 94

7 Hgh share of expendure on food n household expendure n EMs Emergng Markes Advanced Economes Indonesa 53.0 Japan 4.7 Venam 49.8 Germany.5 Inda 48.8 Ausrala 0.8 Chna 36.7 Canada 9.3 ussa 33.2 Uned Kngdom 8.8 Malaysa 28.0 USA 5.7 Average 4.6 Average 0.

8 Fnancal frcons mply... py Idosyncrac shocks maer for consumpon choce Income and expendure of households depend on Composon of household expendure Prce elascy of demand for goods

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10 Prce elascy of demand for food s low -. USA LUX -.2 BB DNK HKG CHE BMU CAN AUS DEU AUT BEL FA GB JP N NO -.3 TJK MWI MLI MDG NG A ZMB YEM MNG MUS CZE NLD SWE BHS NZ L FIN IS SGP IL P T E S P KO GC SVN -.4 ZA BEN OM N KEN AG SLE NPL TKM HUN BGD VNM SEN AZE PAK TUN SVK UY EST GAB KNA KGZ CIV MDA CM PY POL TTO UZB ATG AM BOL CHL LKA ECU IN MEX GIN BL ALB EGY BG JO OM FJI LTUGD GEO IDN KAZ US MAMKD LVA BW BLZJAM PHL SY SWZ PE A DMA BA TU UK ZWE LCA THA LBNVEN BH (log eal GDP per capa

11 Conrbuons Analycally y deermne choce of approprae p prce ndex n an economy wh fnancal frcons More realsc modelng of emergng marke economes esuls more generally applcable o economes wh sgnfcan fnancal frcons

12 Model ncorporaes hese feaures: Incomplee markes rule of humb consumers Subssence level food consumpon Low elascy of subsuon for food Share of expendure on food n oal household expendure hgh Closed economy, no physcal capal

13 Model Two secor, wo good closed economy new Keynesan model Secors Flexble prce secor (food Scky prce secor (non food Goods one ype of flexble prce good ( C F connuum of monopolscally produced scky prce goods c( z ndexed n z (0,

14 +λ Connuum of nfnely lved households Heerogeneous n erms of borrowng opporunes No sorage echnology or nvesmen λ fracon face lqudy consran: consume her wage ncome every perod Ohers are free o borrow Each household owns a frm and produces one good Each household owns a frm and produces one good (labor mmoble beween secors

15 Households ndexed by maxmze he Households, ndexed by, maxmze he dscouned sream of uly ] ( [ N C U E u(. represens he uly of he form ], ( [ 0 0 N C U E ( (, ( n N C N C U, *, ( s f C C C C 0, ( z c C s 0

16 Moneary polcy rule (Taylor rule yp y ( y Y Y y Flexble prce secor shock S k h k (0,..,,, a,f f af f d A A Scky prce secor shock (0 d A A (0,..,,,, s a s as s d A A

17 Two marke specfcaons Complee fnancal markes Incomplee fnancal markes

18 Polcy regmes Src core nflaon argeng _ Src headlne nflaon argeng, s s Flexble core nflaon argeng _ Flexble core nflaon argeng, Y Y y s s Flexble headlne nflaon argeng Y Y y

19 Calculang welfare gans Welfare under src core nflaon argeng as baselne c Welfare cos,, s defned as consumpon needed o make consumers as well off under src core nflaon argeng as under regme a V a 0 E 0 0 c U (( C r, N r Posve number ndcaes welfare s hgher under regme a c *00 gves he percenage of lfe me consumpon

20 esuls: Welfare cos of argeng dfferen prce ndces Complee Markes Incomplee Markes Src Headlne Flexble Headlne Flexble Core Src Headlne Flexble Headlne Flexble Core Targeng Targeng Targeng Targeng Targeng Targeng Welfare gan (n % of src core nflaon argeng consumpon

21 Explanaon of resuls Consraned households demand nsensve o neres rae flucuaons, deermned by real wages Fnancal frcon esablshes a lnk beween real ncome of consraned consumers and aggregae demand

22 So, prce n flexble prce secor affecs aggregae demand In order o affec aggregae demand, cenral bank mus sablze prces n flexble prce secor Also, nflaon and oupu may move n oppose drecons sablzng oupu gap s welfare mprovng

23 Sensvy analyss Whou subssence level of food consumpon Elascy of subsuon beween food and non food Los of addonal analyss of sensvy o model parameers esuls hold up que well

24 Exensons Alernae characerzaon of complee markes More general seng where households n eher secor can be cred consraned

25 Alernae complee marke seng In mos models households can nsure fully agans ncome rsks ex- ane We look a seng when households can nsure only ex-pos

26 esuls under alernae complee marke sengs Elascy of Subsuon Flexble Headlne Inflaon Targeng 0.6 a

27 Complee general marke seng A fracon of people n boh secors are cred consraned We choose he fracons such ha overall 50% of he households n he economy are cred consraned

28 esuls of general marke seng Fracon of households n Fracon of households n Welfare gans scky prce secor wh access o formal flexble prce secor wh access o formal from flexble headlne nflaon argeng fnance fnance

29 Conclusons In he presence of fnancal frcons core nflaon argeng no opmal Presence of cred consraned consumers esablshes a lnk beween prce n he flexble prce secor and aggregae demand Snce nflaon and oupu may move n oppose drecon argeng flexble headlne nflaon opmal

30 Polcy mplcaons, broader nuon In real world, cenral bank has o respond o food prce volaly from a pure welfare perspecve Inflaon expecaons anoher channel Sub-opmal response o supply shocks Yes, bu

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32 New challenges facng cenral banks Soveregn deb rsng; fnancal represson? Exchange rae And foodfuelcommody prce ncreases

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