Food Prices, Monetary Policy, and Currency Reform (It’s More Interesting Than It Sounds)

Marcus Noland (PIIE) and Stephan Haggard (PIIE)
January 28, 2011 10:15 AM

Grain prices in North Korea are rising according to recent reports, possibly both due to disruptions in domestic markets (for instance renewed food procurements for the military) and rising prices globally.  But another possibility is that the price inflation is reflective of monetary policy in the aftermath of the failed November 2009 currency reform.

That reform knocked two zeros off the currency and in principle should have reduced prices to 1 percent of their previous level. But the unpopularity of the reforms forced haphazard commitments to higher wages, and the resultant expansion of the money supply partly negated whatever macroeconomic stabilization the North Koreans thought that they were accomplishing. The issue of how to interpret the subsequent path of nominal prices has bedeviled analysts since the reform.

The two panels below report data on prices for rice and corn.  The charts indicate that prices have risen to roughly 35-40 percent of their pre-reform trend line, suggesting that excess growth in the money supply has undone a significant share of the reform. And grain price inflation has accelerated significantly, from an annual rate of 35-40 percent before the reform, to 500-600 percent over the past year.

Admittedly grain prices are rising worldwide, so the observed increase in grain prices may contain an element of relative price increase, but if food prices are interpreted as a proxy for the overall price level, these data suggest a rapidly growing money supply and accelerating inflation in North Korea.

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