Food Price Shocks and Household Consumption in Developing Countries: The Role of Fiscal Policy

Abstract

This paper studies whether fiscal policy plays a stabilizing role in the context of import food price shocks. More precisely, the paper assesses whether fiscal policy dampens the adverse effect of import food price shocks on household consumption. Based on a panel of 70 low and middle-income countries over the period 1980-2012, the paper finds that import price shocks negatively and significantly affect household consumption, but this effect appears to be mitigated by discretionary government consumption, notably through government subsidies and transfers. The results are particularly robust for African countries and countries with less flexible exchange rate regimes.