Foodpricesandinflationinaclosed-economyISASMP.pdfVIP

1 Food prices and inflation in a closed-economy IS/AS/MP model Stephen A. O’Connell2 February 20, 2010 ABSTRACT: An adequate model of food prices and inflation requires at least two adjustments to the core DSGE model. The first is to disaggregate the food and non-food sectors in order to accommodate exogenous shocks to agricultural output. The relative price of food is determined mainly on the supply side and should play a key role in the short-run dynamics. The second adjustment is to incorporate some influence of international trade. In this note I focus on the first of these features by looking at food prices and inflation in a closed-economy IS/AS/MP model. I emphasize the potential importance of private grain storage in determining the dynamic response to food supply shocks. 1 This note is an extended Appendix to my paper “Towards a Rule-Based Approach to Monetary Policy Evaluation in Sub-Saharan Africa” presented at the AERC Plenary Session on Central Banking in Africa, December 2009 (forthcoming in a special issue of Journal of African Economies). 2 Eugene M. Lang Research Professor, Department of Economics, Swarthmore College; and International Growth Centre, Tanzania (steve_oconnell@). 1 1. Introduction An adequate model of food prices and inflation requires at least two adjustments to the core DSGE model described in O’Connell (