Abstract
Abstract:This study examines the price level and volatility interaction between international staple food and cash crop futures price indices. Understanding the relationship between these commodities bears significant implications for low-income food deficit countries that depend on cash crops to finance food import bills. We use a wavelet analysis to decompose the price indices and then apply a BEKK-MGARCH (Baba, Engle, Kraft and Kroner–multivariate generalized autoregressive conditional heteroskedasticity) approach to analyze the relationship across timescales. Results indicate the level of correlation and volatility linkages are strongest at lower frequencies (longer run) than at higher timescales (short run), with information running from staple food to cash crop markets.
Highlights
For many low-income food deficit countries (LIFDCs),1 swings in staple food prices are an important source of macroeconomic instability
The analysis carried out in this article examines the volatility interaction between staple food and cash crop futures price returns. The dynamics between these commodity groups is relevant for developing countries that depend on cash crop export earnings to address current account imbalances and sustain food imports
We apply a BEKK-GARCH framework supplemented by a wavelet analysis to locate precisely marked periods of volatility and changes in the dynamics at different time horizons
Summary
For many low-income food deficit countries (LIFDCs), swings in staple food prices are an important source of macroeconomic instability. Countries can try to borrow funds from international markets to finance import requirements, balancing a current account deficit with higher capital inflows. This is possible provided countries still have the ability to sustain additional borrowing without prompting a rise in default risks. Rising cash crop and staple food prices translate into increasing export earnings and import bills. The rise in cash crop prices, together with staple food prices, means that export revenues from the commodities that many LIFDCs rely on could act as a good hedge against surges in food import bills and contribute to reducing current account instability.
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