The relationship between food prices and monetary policy: Evidence from Turkey

The recent increase in food prices all over the world is of great importance as it is the main determinant of welfare level and general inflation, especially in middle and low-income countries where food is dominant in the consumption basket. On the other hand, especially for inflation targeting central banks, fluctuations in food prices pose a problem not only for current inflation but also for forecasting future food and headline inflation. Therefore, food price stability is a policy necessity for the welfare of poor households and for the credibility of monetary policy authorities in anchoring inflation expectations in an inflation targeting environment. The aim of this study is, first, to reveal the determinants of food prices in the Turkish economy, which has recently experienced high and volatile food inflation. Secondly, the existence of second round effects caused by the increase in food prices is also investigated. In line with these objectives, the study employs Bayesian Structural VAR (BSVAR) method with the data covering the monthly period of 2003-2023. The findings reveal that the determinants of food prices in the Turkish economy are global food prices, inflation, money supply and agricultural input prices, while the most important driving force is the exchange rate. In addition, the results of the analysis confirm the second round effect from food prices to core inflation. This effect is supported by the Toda Yamamoto causality test. Moreover, food prices lead to an increase in inflation expectations and thus cause the second-round effect to emerge. Accordingly, a significant portion of the high inflation in Turkey is affected by persistent and high inflation in food prices. Achieving the inflation target, stabilizing exchange rates and thus controlling food prices are important for policymakers.