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Food Prices and the Multiplier Effect of Export Policy

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  • Paolo E. Giordani
  • Nadia Rocha
  • Michele Ruta

Abstract

This paper studies the relationship between export policy and food prices. We show that, when individuals are loss averse, food exporters may use trade policy to shield the domestic economy from large price shocks. This creates a complementarity between the price of food in international markets and export policy. Specifically, unilateral actions by exporting countries give rise to a "multiplier effect": when a shock in the international food market drives up (down) its price, governments respond by imposing export restrictions (subsidies), thus exacerbating the initial shock and soliciting further export activism. We test this theory with a new dataset that comprises monthly information on trade measures across 125 countries and 29 food products for the period 2008-10, finding evidence of a multiplier effect. Global restrictions in a product (i.e. the share of international trade covered by export restrictions) are positively correlated with the probability of imposing a new export restriction on that product, especially for staple foods. Large exporters are found to be more reactive to restrictive measures, suggesting that the multiplier effect is mostly driven by this group. Finally, we estimate that a 1 per cent surge in global restrictions increased international food prices by 1.1 per cent on average during 2008-10. These findings contribute to inform the broader debate on the proper regulation of export policy within the multilateral trading system.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3783.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3783

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Keywords: loss aversion; export policy; multiplier effect; food crisis; WTO;

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References

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  1. Limão, Nuno & Tovar, Patricia, 2011. "Policy choice: Theory and evidence from commitment via international trade agreements," Journal of International Economics, Elsevier, Elsevier, vol. 85(2), pages 186-205.
  2. Angus Deaton & Guy Laroque, 1990. "On The Behavior of Commodity Prices," NBER Working Papers 3439, National Bureau of Economic Research, Inc.
  3. Grossman, Gene & Helpman, Elhanan, 1993. "Protection for Sale," CEPR Discussion Papers, C.E.P.R. Discussion Papers 827, C.E.P.R. Discussion Papers.
  4. Botond Koszegi & Matthew Rabin, 2004. "A Model of Reference-Dependent Preferences," Method and Hist of Econ Thought, EconWPA 0407001, EconWPA.
  5. Gouel, Christophe & Jean, Sebastien, 2012. "Optimal food price stabilization in a small open developing country," Policy Research Working Paper Series, The World Bank 5943, The World Bank.
  6. Limão, Nuno & Saggi, Kamal, 2013. "Size inequality, coordination externalities and international trade agreements," European Economic Review, Elsevier, Elsevier, vol. 63(C), pages 10-27.
  7. Headey, Derek, 2011. "Rethinking the global food crisis: The role of trade shocks," Food Policy, Elsevier, Elsevier, vol. 36(2), pages 136-146, April.
  8. Tovar, Patricia, 2009. "The effects of loss aversion on trade policy: Theory and evidence," Journal of International Economics, Elsevier, Elsevier, vol. 78(1), pages 154-167, June.
  9. Will Martin & Kym Anderson, 2012. "Export Restrictions and Price Insulation During Commodity Price Booms," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 94(2), pages 422-427.
  10. Bouet, Antoine & Laborde Debucquet, David, 2010. "Economics of export taxation in a context of food crisis," IFPRI discussion papers, International Food Policy Research Institute (IFPRI) 994, International Food Policy Research Institute (IFPRI).
  11. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(3), pages 441-63, August.
  12. Kyle Bagwell & Robert W. Staiger, 2000. "Strategic Trade, Competitive Industries and Agricultural Trade Disputes," NBER Working Papers 7822, National Bureau of Economic Research, Inc.
  13. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, Springer, vol. 1(1), pages 7-59, March.
  14. Caroline Freund & Caglar Ozden, 2008. "Trade Policy and Loss Aversion," American Economic Review, American Economic Association, American Economic Association, vol. 98(4), pages 1675-91, September.
  15. Christian Broda & Nuno Limao & David E. Weinstein, 2008. "Optimal Tariffs and Market Power: The Evidence," American Economic Review, American Economic Association, American Economic Association, vol. 98(5), pages 2032-65, December.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. How the CAP contributes to world market food price volatility - by Alan Matthews
    by Alan Matthews in CAP Reform.eu on 2012-04-14 08:05:50
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Cited by:
  1. Olga Solleder, 2013. "Trade Effects of Export Taxes," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 08-2013, Economics Section, The Graduate Institute of International Studies, revised 08 Apr 2013.
  2. Jha, Shikha & Kubo, Kensuke & Ramaswami, Bharat, 2013. "International Trade and Risk Sharing in the Global Rice Market: The Impact of Foreign and Domestic Supply Shocks," ADB Economics Working Paper Series, Asian Development Bank 372, Asian Development Bank.
  3. Christophe Gouel, 2013. "Food Price Volatility and Domestic Stabilization Policies in Developing Countries," NBER Working Papers 18934, National Bureau of Economic Research, Inc.

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