Abstract
Food prices have been increasing sharply since 2003. In the globalized world, the transmission of global foodprice increases to domestic market determines the decision of economic agents and policy makers of a domesticeconomy. The recent growth of global food prices affects the welfare of poor consumers and producers. In SriLanka, large segment of the population spends more than 50 percent of their income on food. Thus, this studyinvestigates and assesses how international food price surge affects domestic inflation process in Sri Lanka. Theempirical statistical results are derived by using a battery of parametric and non-parametric econometrictechniques using monthly data of price series for the period from 2003M1 to 2013M12. The co-integrationanalysis results confirm that global food prices, domestic prices are co-integrated. Therefore, Sri Lankangovernment needs to develop a safety net program for the poor and a longer term poverty reduction strategy.Policy attention needs to shift towards efforts to increase food production. The results of this study have variouspolicy implications for monetary policy, food and agricultural policy and trade policy for Sri Lanka.
Highlights
Following globalization, the interdependency of each country has increased
This study adopts a simple model based on the Law of One Price (LOP) to express the relationship between global food prices and domestic prices and test the transmission effect
We find evidence of statistically and economically significant international food price pass-through effects to domestic price inflation dynamics in Sri Lanka
Summary
The interdependency of each country has increased. Over the past few decades, many developing and emerging countries have become more integrated into the global economy. High and increasing food prices pose a significant policy challenges for developing and emerging countries where households spend a larger share of their income on food (Kelbore, 2013). The features of these price dynamics are (i) food prices are more volatile, since 2007, there is sharp increases and high volatility in global food prices, (ii) upward movement and global food price and domestic food price are co-moved. This study attempts to answer the following questions: i) to what extent world food prices pass-through domestic prices in Sri Lanka? The objective of this study is to analyse in-depth the pass-through effects of international food prices to producer and consumer prices in the domestic inflation dynamics in Sri Lanka for the periods of 2003M1-2013M12.
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