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Slutsky Own-Price Elasticity of Demand for Food, 1996  

Slutsky Own-Price Elasticity of Demand for Food, 1996  

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In models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. In this paper, we develop a two-sector two-good closed economy new Keynesian model to study the optimal choice of price index in markets with financial frictions. Financial frictions that limit credit-...

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... income elasticity of food in emerging markets is on average twice as large as that in advanced economies. Figure 3 plots, for a large sample of countries, the Slutsky own price elasticity of food against the log real per capita GDP for the year 1996. 9 The price elasticity of food demand is nonlinear, decreasing at low income levels, and then increasing, with a range from -0.4 to -0.1. ...

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... In the situation of an incomplete financial market, targeting headline inflation is better as it helps improve community welfare (Anand & Prasad, 2010;Anand et. al. 2015). ...
Article
One key to showing the effectiveness of monetary policy is the transmission mechanism through which it affects aggregate demand and inflation. Following that norm, this paper aims to evaluate the effectiveness of monetary policy in controlling food price inflation in Sri Lanka. The analysis consists of secondary data collected every month from January 2019 to May 2023. Vector Autoregression (VAR) is used as the main analytical technique, and the conclusions were drawn based on the results of impulse responses and variance decomposition analyses. Further, the Granger causality test is used to find possible causal directions. Results revealed that positive innovations in the interest rate and the exchange rate have an immediate negative effect on food prices but a steady rise after two months, emphasizing the delayed effect of monetary policy. Variance decomposition results show that the real effective exchange rate, GDP, household consumption, and national consumer price index are important in explaining food inflation in Sri Lanka. Granger causality test results confirmed the findings showing one-way causality of all variables towards food prices. Thus, the paper concludes that tight monetary policy is effective in reducing food inflation but has a slow adjustment process, therefore, further tightening of both policy measures is essential.
... Measures that exclude food are also found to not perform well in terms of predictive power in country specific cases (Rich and Steindad, 2007;Alvarez et al. 2006). Furthermore, in the context of international commodity price cycles, it has been observed that mechanisms transmitting food price shocks may be changing -in many countries, headline inflation is not reverting to core in the same degree it did earlier, implying that secular forces may be at work (Anand and Prasad, 2010;Catao and Chang, 2015;Walsh, 2016). ...
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... 24 This relationship is known as Engel's law (see Figure 6). 25 As food represents a sizable share of income expenditure and is an inelastic good 26 , a sizable price increase in real terms may have an affect, especially for credit-constrained households (e.g., Anand and Prasad (2010), Ginn and Pourroy (2019)). ...
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... Some previous research concludes that targeting core inflation is the optimal policy measure of inflation that maximises welfare benefits and macroeconomic stability of the economy when the financial market is complete (Aoki 2001). However, others argue that targeting headline inflation is the appropriate policy for emerging economies, where the proportion of spending on food on aggregate expenditure is higher, and most people do not have access to credit facilities (Anand and Prasad 2010;Catao and Chang 2015;Anand, Prasad and Zhang 2015). In this literature, it is argued that aggregate inflation targeting is an optimal policy measure for developing countries. ...
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... Moreover, only a few recent studies estimated potential output using the other two approaches (Basu & Fernald, 2009;Bechnỳ, 2019;Edge, Kiley, & Laforte, 2008;Fueki et al., 2016;Kiley, 2013;Leist & Neusser, 2010;Primiceri & Justiniano, 2009;Vetlov et al., 2011). In the Indian context, most studies use either statistical methods (Bhoi & Behera, 2017;Bordoloi, Das, & Jangili, 2009;Goyal & Arora, 2012) or a production function-based measure (Anand & Prasad, 2010;Bhoi & Behera, 2017;Bosworth & Collins, 2008;Mishra, 2013;Oura, 2007;Ranjan, Jain, & Dhal, 2007;Rodrik & Subramanian, 2004) to estimate potential output or output gap. There are few recent studies that focus on multivariate filters, taking into account both structural relationships along with statistical methods to estimate potential output for India (Bhoi & Behera, 2017;Blagrave, Garcia-Saltos, Laxton, & Zhang, 2015;Rath, Mitra, & John, 2017). ...
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... The IMF (2011) notes that food prices tend to have stronger and longerlasting effects on inflation in economies with high food shares in the consumption basket, and in economies with less firmly anchored expectations. Anand and Prasad (2010) conclude that in an environment of credit-constrained consumers, which is a common feature of emerging market economies, a narrow policy focus on non-food inflation can lead to suboptimal outcomes. The conclusion reached by Anand, Ding, and Tulin (2014) is that ignoring food inflation in monetary policy formulation may lead to policy mistakes. ...
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An augmented P-Star model is estimated and tested to identify the drivers of inflation in India. The model includes monetary and non-monetary factors, demand-pull and cost-push factors, and domestic as well as foreign factors. The results show that inflation in India is driven by a combination of monetary factors and non-monetary factors, some of which affect inflation on the supply side while others operate on the demand side. It turns out, however, that inflation in India is determined more by domestic rather than foreign factors.
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