Abstract
High and volatile food prices pose a significant policy challenge around the world, and an understanding of the dynamics of food price inflation and volatility is essential in designing appropriate policy responses. Using the panel data for 72 countries from 2000 to 2011, the paper assesses the international transmission of food price inflation and volatilities as well as the effects of various internal and external factors on domestic food price inflation and volatility. The paper offers evidence in support of the international transmission of food price inflation and volatility. Specifically, the paper finds that the domestic food price inflation in Asia is strongly associated with the lagged value of global food price inflation (using the FAO food price index), while volatility spillovers from global to domestic food prices are rather contemporaneous. The paper also finds that both national food price inflation rates and volatilities are strongly associated with both intra- and extra- regional food price inflation rates and volatilities, respectively. The findings also suggest that higher economic growth rates, greater shares of food in merchandise imports, and smaller increases in the share of food in merchandise imports lead to lower domestic food price inflation. An appreciation of local currency, greater political stability, and higher income level are also found to lower domestic food price inflation. On the other hand, higher economic growth rates lead to lower volatilities of food prices.
Highlights
Global food prices and their volatilities have risen sharply in recent years.1 High and increasing food prices pose a significant policy challenge, in developing countries where the share of food in household expenditure is relatively high (FAO et al 2011)
The results suggest that national food price inflation rates move together with the countries in the same region and with those located outside the region
The main purpose of this paper is to offer a comprehensive assessment of what influenced national food price inflation and its volatilities during 2000–2011
Summary
Global food prices and their volatilities have risen sharply in recent years. High and increasing food prices pose a significant policy challenge, in developing countries where the share of food in household expenditure is relatively high (FAO et al 2011). Global food prices and their volatilities have risen sharply in recent years.. The world witnesses larger and more frequent swings in food prices, perhaps owing to the effects of climate change and the volatility of oil prices. The high volatility of food prices and the associated uncertainty may impede the production and investment decisions of food producers, and lead to inefficient resource allocation in agriculture. Noting the importance of food price volatility in policy responses, Kharas (2011) argues, “The crux of the food price challenge is about price volatility, rather than high prices per se.” Roache (2010) observes, “[V]olatility has made the policy response to changes in food prices more challenging and complicated the investment and consumption decisions of many businesses and consumers.”
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