Rising food inflation and India's monetary policy

Vivek Moorthy · Shrikant Kolhar

22 citations0/0 files storedIndian Growth and Development Review

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Monetary Policy and Economic Impact Economics of Agriculture and Food Markets Market Dynamics and Volatility

Abstract

Purpose The purpose of this paper is to analyse the implications of sharply rising food prices for monetary policy in India and similar emerging economies at present. Design/methodology/approach This paper uses analytical arguments from relevant macroeconomic literature and evidence from late 1960s US data to examine whether the 1970s stagflation was due to the OPEC price hike. It develops a two person (rich and poor), two commodity (food and non‐food) model to examine the impact of rising food prices on GDP, on measures of inflation, and on welfare, in the model. Findings Previously neglected evidence indicates that stagflation (simultaneously rising unemployment and inflation) preceded the OPEC price hike. The model results indicate that when food prices rise, the GDP deflator falls relative to the consumer price index (CPI). Research limitations/implications The impact of supply shocks should be investigated by carefully examining links between abnormal rainfall and weather and output and prices on commodity by commodity basis. Further, technical issues pertaining to construction of a composite CPI representative of the population need to be explored. Practical implications Monetary policy in India (and similar emerging economies) should focus upon a population weighted CPI or some variant thereof. Social implications High GDP growth should not lead to complacency, since when food prices are rising, the overall welfare impact may be negative. Originality/value The model presented in this paper explains the sustained divergence in India, in recent years, between the CPI versus the GDP deflator measures of inflation. It also highlights a possible similar divergence between GDP and overall welfare.

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References

1995The Role of Monetary Policy 1968Money-Wage Dynamics and Labor-Market Equilibrium 1954Linear Expenditure Systems and Demand Analysis: An Application to the Pattern of British Demand 1985Economics of Worldwide Stagflation 2004Oil and the Macroeconomy Since the 1970s 2002The Role of Agriculture in Development 1981Prices and quantities: A macroeconomic analysis 2001Do We Really Know That Oil Caused the Great Stagflation? A Monetary Alternative

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2024Food inflation and monetary policy in emerging economies

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