Abstract
We evaluated the effectiveness and sustainability of the grain price support policies in China using the structural break regime switching model. Based on the rice, wheat, and corn monthly price data from 1987 to 2017, we provide strong evidence that the Chinese grain price support policies have been effective in stabilizing the domestic grain price. A structural change occurred in grain price patterns in 2004 when the price support policies were established. Since then, Chinese grain prices have followed a regime with significantly lower volatility. We documented several problems challenging the sustainability of the Chinese grain price support policies in the future, including high economic costs that can trigger high support prices, high public stock level, and high grain import pressure. Our findings shed new light on the functioning of the grain pricing policies and provide useful implications for the market-oriented reforms in the Chinese grain market.
Highlights
Price volatility has been a topic of continuing interest in agricultural markets
We propose a modified structural break regime switching model to investigate the changes in grain price volatility with respect to the support price policies
Our findings indicate the Chinese price support policies have been effective in stabilizing its grain market prices since the establishment in 2004, but they are likely to be unsustainable in the future due to the high economic costs
Summary
Price volatility has been a topic of continuing interest in agricultural markets. High price volatility reflects the market response to changing market conditions, and has different effects on market participants [1]. We propose a modified structural break regime switching model to investigate the changes in grain price volatility with respect to the support price policies. As an important part of this transformation, the price support polices were gradually established in China since 2002 This raises two questions: (1) Were the grain support price policies effective in the stabilization of domestic grain prices? Our findings indicate the Chinese price support policies have been effective in stabilizing its grain market prices since the establishment in 2004, but they are likely to be unsustainable in the future due to the high economic costs.
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