TY  - JOUR
AU  - Catão,Luis
AU  - Chang,Roberto
TI  - World Food Prices and Monetary Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16563
PY  - 2010
Y2  - December 2010
UR  - http://www.nber.org/papers/w16563
L1  - http://www.nber.org/papers/w16563.pdf
N1  - Author contact info:
Luis Catão
International Monetary Fund
700 19th Street
Washington DC 20431
E-Mail: lcatao@imf.org

Roberto Chang
Rutgers University
Department of Economics
75 Hamilton Street
New Brunswick, NJ  08901
Tel: 732/932-7269
Fax: 732/932-7416
E-Mail: chang@econ.rutgers.edu
AB  - In recent years, large fluctuations in world food prices have renewed interest in the question of how monetary policy in small open economies should react to imported price shocks. We address this issue in an open economy setting similar to previous ones except that food plays a distinctive role in utility. A key novelty of our model is that the real exchange rate and the terms of trade can move in opposite directions in response to food price shocks. This has several consequences for observables and for policy. Under a variety of model calibrations, broad CPI targeting emerges as welfare-superior to alternative policy rules once the variance of food price shocks is as large as in real world data.
ER  -