Markets, Transportation Infrastructure, and Food Prices in Nepal

We study transportation infrastructure and food markets in Nepal over the period 2002 to 2010, combining monthly price data from thirty-seven local and regional markets, and seven Indian border markets. We use a series of autoregressive models to study price determination, spatial and temporal price transmission, and price variance. We account for district-level agricultural production, correcting for bi-directional causality between output and prices using ground station rainfall data. In addition, to test hypotheses regarding the importance of transportation infrastructure we incorporate information on road and bridge density and fuel costs. For both rice and wheat, we find strong evidence of local price intertemporal carryover and very weak evidence of price transmission from regional, central, and border markets to local markets, suggesting very low degrees of market integration. Fuel costs are positively correlated with food prices, and road and bridge density are negatively correlated with prices. We find evidence of asymmetric effects: positive price shocks are correlated with higher subsequent price volatility compared with negative price shocks of similar magnitude. Roads and bridges are important for moderating price levels and price volatility in Nepal’s rice and wheat markets, which explains roughly half of the spatial and temporal variation in price mark-ups between regional and local markets.