Abstract
This paper examines the extent to which increases in international food prices during the past few years have been transmitted to domestic prices in selected Asian developing countries. In analyzing the historical data, evidence on price transmission for important food commodities such as rice, wheat, and edible oil have been considered. The price transmission elasticity has been estimated using regression models coupled with recent econometric techniques such as unit root tests and error correction models with threshold adjustment. Finally, the paper draws some policy implications from the empirical results. This study provides the numerical estimates on the empirical relationship between international prices and domestic prices. The analysis uses commodity-specific monthly data rather than annual data during a period of substantial policy reforms in order to understand both long-run and short-run relationships between world and domestic prices.
Highlights
International agricultural commodity prices are set to rise considerably over the near future amid growing demand from emerging economies such as the People’s Republic of China (PRC) and India and for biofuel production, according to an annual joint report by the Organisation for Economic Co-operation and Development (OECD) and the Food and Agriculture Organization (FAO)
Soybean oil shows a trendless behavior in the first regime (January 1967 to March 1973) followed by a negative trend in the second regime (April 1973 to November 2000), and a positive trend in the third regime (December 2000 to February 2010)
Though the break dates are different, both show no trend in the first regime, a negative trend in the second regime, and a trendless behavior in the last regime
Summary
International agricultural commodity prices are set to rise considerably over the near future amid growing demand from emerging economies such as the People’s Republic of China (PRC) and India and for biofuel production, according to an annual joint report by the Organisation for Economic Co-operation and Development (OECD) and the Food and Agriculture Organization (FAO). Higher food demand in the emerging economies have led to reductions in food exports from these countries; and rising oil prices have led to increased demand for biofuel raw materials such as wheat, soybean, maize, and palm oil, which in turn have reduced the use of such crops for food production and animal feed. The implication of the impact of higher food prices on households, especially the poor in these countries, makes it necessary for policy makers to know whether and to what extent international commodity prices are transmitted to domestic prices and its impact on the economy. In view of the importance of the issue, it is necessary for policy makers to design appropriate domestic economic and trade policies that can mitigate the adverse effects of international price changes on domestic prices based on credible knowledge of the “price transmission elasticity” between imported and domestically produced goods
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