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Implications of domestic price insulation for global food price behavior

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  • Ivanic, Maros
  • Martin, Will
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    Abstract

    Rapid changes in global food prices in recent years are widely viewed as a serious threat to global development. While various sources of price instability in agriculture have been identified, little attention appears to have been given to the importance of changes in trade policies that insulate domestic prices from world markets as a source of volatility in world prices. A contribution of this paper is to show that these interventions are dynamically more complex than simple proportional insulation. Insulation against an initial price increase in world prices increases the magnitude of that increase, while subsequent adjustments to the level of protection change the fundamental nature of price volatility. We find such policies are widespread and increase the volatility of world prices while not reducing the volatility of domestic prices because of the collective action problem involved in this form of policy intervention.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 42 (2014)
    Issue (Month): C ()
    Pages: 272-288

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    Handle: RePEc:eee:jimfin:v:42:y:2014:i:c:p:272-288

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    Web page: http://www.elsevier.com/locate/inca/30443

    Related research

    Keywords: Price volatility; Insulation; Trade policy; Protection; Storage model;

    References

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    1. Kym Anderson & Maros Ivanic & Will Martin, 2013. "Food Price Spikes, Price Insulation, and Poverty," Departmental Working Papers 2013-11, The Australian National University, Arndt-Corden Department of Economics.
    2. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
    3. Deaton, Angus & Laroque, Guy, 1995. "Estimating a Nonlinear Rational Expectations Commodity Price Model with Unobservable State Variables," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(S), pages S9-40, Suppl. De.
    4. Deaton, Angus & Laroque, Guy, 1992. "On the Behaviour of Commodity Prices," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 1-23, January.
    5. Anderson, Kym & Martin, Will, 2011. "Export Restrictions and Price Insulation During Commodity Price Booms," CEPR Discussion Papers 8494, C.E.P.R. Discussion Papers.
    6. Anderson, Kym & Rausser, Gordon & Swinnen, Johan, 2012. "Political Economy of Public Policies: Insights from Distortions to Agricultural and Food Markets," CEPR Discussion Papers 9221, C.E.P.R. Discussion Papers.
    7. Cafiero, Carlo & Bobenrieth H., Eugenio S.A. & Bobenrieth H., Juan R.A. & Wright, Brian D., 2011. "The empirical relevance of the competitive storage model," Journal of Econometrics, Elsevier, vol. 162(1), pages 44-54, May.
    8. Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 47(2), pages 119-29, May.
    9. Gollin, Douglas, 2006. "Changes in Yield Stability: Wheat and Maize in Developing Countries," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25239, International Association of Agricultural Economists.
    10. Anderson, Kym & Kurzweil, Marianne & Martin, Will & Sandri, Damiano & Valenzuela, Ernesto, 2008. "Measuring distortions to agricultural incentives, revisited," World Trade Review, Cambridge University Press, vol. 7(04), pages 675-704, October.
    11. Irwin, Scott H. & Sanders, Dwight R. & Merrin, Robert P., 2009. "Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 41(02), August.
    12. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
    13. Zhang, Zibin & Lohr, Luanne & Escalante, Cesar & Wetzstein, Michael, 2010. "Food versus fuel: What do prices tell us?," Energy Policy, Elsevier, vol. 38(1), pages 445-451, January.
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