Testing price leadership in major regional maize markets in Ethiopia: implications for targeted market intervention

Abstract

ABSTRACTThe central market hypothesis or price leadership role is an important concept of market integration, and it has relevant policy implications because it simplifies market price monitoring and intervention in the grain market. Knowledge about the presence of a central market and its price dynamic effects on satellite markets will assist the effectiveness of food assistance and other humanitarian food price support interventions. This is of particular interest to constant food aid recipients such as Ethiopia. This article intends to empirically investigate as to whether or not there is a central maize market that dictate and lead price information flow over the regional wholesale maize markets in Ethiopia. If such a dominant maize market exists, then how does its price affect the maize grain prices of major regional wholesale maize markets in Ethiopia? The extended VAR procedure of Toda and the Yamamoto Granger Causality approach is used to test the central maize market hypothesis. Furthermore, we use the system of seemingly unrelated regression model to examine the effects of the central market price on three wholesale regional maize market prices in Ethiopia. The results indicate that Addis Ababa wholesale maize market influences the maize price formation of all regional maize markets examined in this study. Therefore, interventions targeting the central wholesale market could successfully provide a buffer for local maize surplus and consumption markets against undesirable price shocks stemming from the central market.