The Contribution of Food Subsidy Policy to Monetary Policy

William Ginn (1) , Marc Pourroy

1 Université de Nuremberg

Monetary policy is generally viewed in the literature as the only institution responsible for price stability. This approach overlooks the importance of food price stabilization policies, which are particularly important in low-and middle-income economies. We estimate a Bayesian DSGE model that incorporates fiscal and monetary policy tailored to India. Fiscal policy is based on a consumer food price subsidy. The empirical evidence suggests that food subsidies create a policy-induced form of food price-stickiness that operates in parallel with, yet is different to, the classic Calvo monopolistic competition framework. We find that the food price subsidy reduces CPI volatility and monetary policy reaction: following a world food price shock, interest rate volatility would be 10% higher absent food subsidies. Putting this effect aside would lead to overestimate the effectiveness of inflation targeting in EMEs. A main finding is the subsidy policy reduces aggregate welfare, albeit we find heterogeneous distributional effects by households.

Mots clés: Monetary Policy; Commodities; Food prices; Price stabilisation; DSGE Model

Domaines: Economies et finances; Économie et finance quantitative [q-fin]

William Ginn, Marc Pourroy. The Contribution of Food Subsidy Policy to Monetary Policy. 2020. ⟨hal-02944209v1⟩