The Effect of Monetary Policy on Food Price Index: An Application of Factor Augmented Vector Autoregressive (FAVAR) Approach

Achieving an acceptable level of price growth is one of the main objectives of economic policies. With consideration to the importance of food، information on food price response to monetary policies is important. To achieve the object، scholars recently emphasize the use of models in which a wide range of economic data are included. These models are created by inclusion of one or more factors within the traditional VAR models. In this study، we tried to evaluate the effect of monetary policy on food price by using small scale of FAVAR model. For the purpose، 31 macroeconomic variables in periods 1367:1 to 1387:4 were included. The results showed that the liquidity shock has not influenced food price index for approximately ten next seasons. After this period، the liquidity shock makes increasing fluctuations on food price in such a way that the equilibrium has not been reachable. Therefore، a monetary shock will lead to instability fluctuations in the food price index for the long run. The fluctuations are cyclic and will increase over time in the way that they present reductions and increases around an equilibrium point.