
Contents
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1 Introduction 1 Introduction
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2 The Model 2 The Model
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2.1 The Representative Consumer 2.1 The Representative Consumer
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2.2 The Consumption Basket and Prices 2.2 The Consumption Basket and Prices
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2.3 The Non-Traded Sector 2.3 The Non-Traded Sector
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2.4 Monetary Policy: Identifying First-Round Effects 2.4 Monetary Policy: Identifying First-Round Effects
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2.5 Market Clearing Conditions and Model Closure 2.5 Market Clearing Conditions and Model Closure
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2.6 Definition of the First-Round Effects Equilibrium and the Steady State 2.6 Definition of the First-Round Effects Equilibrium and the Steady State
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3 Analytical Solution 3 Analytical Solution
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3.1 The Log-linear Version of the Model 3.1 The Log-linear Version of the Model
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3.1.1 Financial Autarky (FA) 3.1.1 Financial Autarky (FA)
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3.1.2 Complete Markets (CM) 3.1.2 Complete Markets (CM)
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3.1.3 Incomplete Markets (IM) 3.1.3 Incomplete Markets (IM)
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3.1.4 The Link between Inflation, Relative Prices, and First-Round Effects 3.1.4 The Link between Inflation, Relative Prices, and First-Round Effects
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3.2 Solving for the First-round Effects 3.2 Solving for the First-round Effects
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4 A Simple Numerical Assessment 4 A Simple Numerical Assessment
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5 Conclusions 5 Conclusions
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References References
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10 On the First-Round Effects of International Food Price Shocks
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Published:March 2018
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Abstract
The chapter presents a small open-economy model to study the first-round effects of international food-price shocks in developing countries. First-round shocks are defined as changes in headline inflation that, holding core inflation constant, help implement relative price adjustments. The model features three goods (food, a generic traded good, and a non-traded good), varying degrees of tradability of the food basket, and alternative international asset market structures. First-round effects depend crucially on the asset market structure. Under complete markets, inter-temporal substitution prevails, making the inflationary impact of international food price shocks proportional to the food share in consumption, which in developing countries is typically large. Under financial autarky, the income channel is dominant, and first-round effects are instead proportional to the country’s food trade balance, which is typically small. The results cast some doubt on the view that international food price shocks inherently have large inflationary effects in developing countries.
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