ITAM and IMF

Global real food prices increased by about fifty percent between 2003 and 2013. This increase occurred after a two-decade period of food price stability. It is of concern because food prices may affect disproportionately those who are economically vulnerable. Indeed, households in low income countries (LICs) devote half of their budget to food while house-holds in developed nations devote less than 15 percent. It is also true, however, that a larger fraction of households are food producers in LICs and most of the exports of these coun-tries relate to commodities. As a result, the impact of increases in food prices on LICs is not obvious. In this paper, we derive the quantitative implications of observed changes in food prices on macroeconomic aggregates and the distribution of income, and study the impli-cations of some of the policies currently being debated to mitigate the impact of this shock. Our tool of analysis is a multi-sector dynamic general equilibrium model that includes key features of LICs economies and heterogenous agents subject to idiosyncratic and aggre-gates shocks. We calibrate the model to Ghana, which has unique household panel data. We find this shock can have strong distributional implications that operate through general equilibrium effects by changing the price of domestic food, and thus the purchasing power of farmers vis-a-vis other agents. Non distortionary food subsidies can partially undo the negative effects of this shock. ⇤The authors are grateful to U.K.’s DFID for the generous financial support. We thank Paolo Falco for his ex-tensive help with the GUHPS data set, as well as the participants of the Oxford CSAE 2014 conference for their generous feedback. The views express herein are those of the authors and do not necessarily reflect the views of the IMF