Food Subsidies and Inflation in Developing Countries: A Bridge Between Structuralism and Monetarism

This paper examines the efficacy of food consumption subsidies as anti-inflation policy in developing countries characterized by rigidities of food supply. First a standard structuralist model is utilized to show that though a policy of food consumption subsidies brings down inflation in the very short run, eventually it is self-defeating: a lower relative price of food encourages demand for scarce food and exacerbates inflationary pressures. Next, a monetarist feature, the asset creation effects of subsidy payments feeding through the government budget constraint, is added to the structuralist model. One might expect that this would reinforce the results of the structuralist model, but it is shown that the ensuing inflation is not unambiguously higher than the inflation in the pure structuralist version.