The contribution of food subsidy policy to monetary policy in India

Food price volatility is a major threat for welfare, economic prosperity and political stability. The monetary authority generally viewed in the literature as only institution responsible stability, however this approach overlooks importance of food stabilization policies using fiscal instruments. We develop estimate Bayesian DSGE model that incorporates policy tailored to India, replicating demand supply subsidies. find following world shock, CPI therefore interest rate would be 21% higher absence Putting effect aside lead overestimating effectiveness inflation targeting by central bank. Accordingly, we subsidy has large heterogeneous distributional welfare effects: while farmers benefit from all subsidies, inclusion urban households into program required offset cost.