Monetary policy, exchange rates and food price dynamics: navigating heterogeneity in non-Eurozone countries

Abstract

Purpose This study examines the drivers of food inflation in EU member states outside the euro area, focusing on exchange-rate dynamics, global shocks and monetary conditions in an environment of pronounced cross-country heterogeneity. Design/methodology/approach Using monthly data from 2007 to 2023, the study applies a cross-sectionally augmented autoregressive distributed lag (CS-ARDL) model, which captures cross-country dependence and heterogeneous monetary transmission. Complementary models test robustness by excluding Denmark's fixed exchange rate regime and by introducing asymmetric exchange rate effects to assess whether depreciation and appreciation have unequal impacts on food inflation. Findings The results indicate strong and persistent pass-through from depreciation against the US dollar to food inflation, while appreciations generate considerably weaker disinflationary responses. Global food and energy price shocks contribute materially to inflation dynamics, reinforcing the dominance of external factors. Changes in the euro exchange rate are not statistically significant in the baseline models, consistent with muted or heterogeneous euro pass-through once common shocks are controlled for. Monetary conditions exhibit at most a weak and indirect association with food inflation: the M0 coefficient is generally small and unstable, and robustness checks replacing M0 with short-term money market rates yield qualitatively similar conclusions. Originality/value The study provides new evidence that food inflation in non-euro EU economies is primarily shaped by external exchange-rate and global price shocks, with limited additional explanatory power from monetary proxies after controlling for common factors. The findings highlight the importance of exchange-rate stability and structural resilience in mitigating food-price pressures in small open economies.