Abstract
How the price of food is determined has become a critical issue, given the drastic surges in prices in recent years and the prevailing expectation of further increases. Along this line, this paper examines the sources of food price fluctuations in 11 developing Asian countries. The working model is a block vector autoregression (VAR), and 10 variables are classified into three blocks — world, region, and country — depending on their origin and nature. Empirical evidence shows that the regional shock plays a pivotal role in explaining the variations of domestic food prices, particularly at medium- to long-term horizons. Contrary to conventional belief, the world food price shock contributes little to the dynamics of domestic food prices in developing Asia. The findings suggest Asian food markets are more integrated regionally than with the world market. The short-run movements of domestic food prices are accounted for largely by the country’s own shock. Taken together, our findings suggest that promoting food price stability would require efforts at the regional level as well as at the domestic level, reflecting the influence of region-specific factors. Extensions to the developing countries in other regions produce similar findings on the determination of food prices.
Highlights
The world witnessed dramatic increases in the prices of major agricultural commodities from 2006 to 2009
World gross domestic product (GDP) (WR_GDP) was obtained by summing up the real GDP of the United States (US) and the European Union (EU) from Global Insight and accounts for about 50% of world GDP according to the 2010 statistics of the International Monetary Fund (IMF)
For world food price (WR_FDP), we used the world food price index compiled by the Food and Agriculture Organization of the United Nations (FAO; http://www .fao.org)
Summary
The world witnessed dramatic increases in the prices of major agricultural commodities from 2006 to 2009. Referred to as the global food crisis, the food price surge in 2007–2008 was phenomenal, registering an increase of more than 60% in 2 years. Headey and Fan (2008), argue in their comprehensive and critical review that the role of the PRC and India may not be as great as suggested because both countries are relatively self-sufficient in their food supply. They are skeptical that speculation in financial markets is a cause of the current food price crisis given the absence of clear causal linkages between futures and spot prices
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