On the Macroeconomic Management of Food Price Shocks in Low-income Countries

Global food prices have risen sharply in recent years and have become more volatile. In this paper, I examine how these developments are transmitted to domestic food and non-food markets in low-income economies and consider the options available to policymakers concerned with managing the macroeconomic consequences of global food price shocks. I first review the simple economics of the transmission of global food price movements to food and non-food prices in low-income countries. I then use a simple dependent-economy model to illustrate the real macroeconomic and distributional effects of alternative fiscal and trade policy responses to food shocks and how these are determined by the structural characteristics of low-income economies. In the final section, I consider how food price shocks impact on the aggregate price level and, in particular, the implications of increased food price volatility has for the design and conduct of monetary policy in low-income economies.