Time Path of Price Adjustment in Domestic Markets of Non-tradable Staples to Changes in World Market Prices

The paper presents a model to analyze the adjustment of prices of non-traded food staples to changes in global food prices via the response of traded commodities in domestic markets. It shows that the impact on local prices of shocks originating in global markets lasts much longer than suggested by findings in the traditional literature on market integration. Furthermore, unlike the conventional analysis which focuses on estimating a single parameter indicating the degree of market interconnectedness, the model used here allows us to trace the future impact of shocks on local prices over time and thus helps policy makers to anticipate changes and better plan response strategies. It combines the methodology developed by Gonzales-Rivera and Helfand (2001) and Granger and Gonzalo (1995) on market cointegration with the model developed by Badiane and Shively (1998) for the estimation of the time path of price adjustments to market shocks. It is then applied to monthly price data over a 12-year period from all major regions of Niger, a landlocked country that is extremely vulnerable to volatility in staple foods markets. The results suggests that it takes much longer for the impact of shocks on local prices to stabilize. They also show that the impact of shocks originating from global markets can be more pronounced across markets for non-traded staples, such as local maize and sorghum, compared to traded food commodities such as rice. Furthermore, it appears from the findings that prices the two non-traded staples tend to be “stickier” as their rate of increase decelerates much more slowly than for rice.