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. When world prices are unstable, the use of import tariffs in importing countries to stabilize price is theoretically not the first best policy. But in practice many countries use import tariffs with intention to stabilize price - and other reasons-, which sometimes achieve some price stabilization, sometimes not. We address the question why is this policy sometimes a success and sometimes a failure? In the context of Kenya, we show that while domestic price levels are mainly explained by seasonal cycles, pluri-annual 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 heteroskedastic model of price determination in which prices and prices volatility are jointly estimated, using monthly data over the 1994-2009 period in Kenya.