Trade Policy Inconsistency and Maize Price Volatility: An ARCH Approach in Kenya

The 2007–2008 food crisis and current food price swings led economists to re-evaluate the potential for policy instruments to manage food price volatility, including tariff policy. The use of tariffs in importing countries to stabilize price is theoretically not recommended because of its domestic and international costs but in practice many countries use import tariffs with the intention to stabilize their domestic prices. Among them, some achieve price stabilization, some do not. We address the reason why it sometimes works, sometimes not. In the context of Kenya, we show that while domestic price levels are mainly explained by seasonal cycles, and international prices, domestic price volatility is mainly explained by inconsistent moves of trade policy. Thus, the ability of a policy regime to lower food price volatility does not depend on the nature of the policy instrument only, but also on the government ability to implement it. We define a consistent policy adjustment as a tariff decrease when world price increases and a tariff increase when world price is decreasing. We use an autoregressive conditionally heteroscedastic model of price determination in which prices and prices volatility are jointly estimated, using monthly data over the 1994–2009 period in Kenya.