Can Food Inflation Be Stabilized By Monetary Policy? A Quantile Regression Approach
Keywords:Monetary policy, Food inflation, Pakistan, Quantile regression
Theoretically, a consistent and well-defined monetary policy can stabilize food inflation. However, empirical findings have reported both positive and negative effects of monetary policy measures on food inflation. In the literature, several analytical techniques are used to grasp the impact of monetary policy tools on food inflation in developed and developing nations. Usually, VAR and ARDL approaches are employed to fulfill this task. However, these techniques do not capture the tail dynamics of food inflation. In countries like Pakistan, where food expenditures are a major chunk of the consumption basket and half of the population is either poor or on the verge of poverty, tackling food inflation has always been a major task for policymakers. To capture the effect of monetary policy on various quantiles of food inflation, we have employed the quantile regression approach in this study. We have used the time series data based on monthly observations from September 2005 to October 2020 of food inflation, monetary policy, and several other variables. We have found that monetary policy and transportation prices remain highly significant across all quantiles, exhibiting a positive impact on food inflation. Thus restrictive monetary policy leads to higher flood inflation in the country. In the case of Pakistan, governments usually provide subsidies to lower the impact of food inflation. It is suggested that a restrictive monetary policy is usually not required when a subsidies-focused fiscal policy is implemented.
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Copyright (c) 2022 Choudary Ihtasham Ali, Sami Ullah, Umar Ijaz Ahmed, Irfan Ahmad Baig, Muhammad Arqam Iqbal, Amjad Masood
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