What Explains the Rise in Food Price Volatility?
The macroeconomic effects of large food price swings can be broad and far-reaching, including the balance of payments of importers and exporters, budgets, inflation, and poverty. For market participants and policymakers, managing low frequency volatilityâ€”i.e., the component of volatility that persists for longer than one harvest yearâ€”may be more challenging as uncertainty regarding its persistence is likely to be higher. This paper measures the low frequency volatility of food commodity spot prices using the spline- GARCH approach. It finds that low frequency volatility is positively correlated across different commodities, suggesting an important role for common factors. It also identifies a number of determinants of low frequency volatility, two of whichâ€”the variation in U.S. inflation and the U.S. dollar exchange rateâ€”explain a relatively large part of the rise in volatility since the mid-1990s.
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