Poverty, Policy and Price Transmission

- The influence of international commodity price changes on domestic food inflation

PhD defence

Christian Elleby

Summary

This thesis consists of four self-contained chapters in which different aspects of the relationship between international commodity markets and domestic food markets are explored. What motivates the analysis is the recent surge in international commodity prices and the controversy over the poverty impact of the 2007-8 ‘food crisis’, in particular.

The first paper analyses, in a stylized economic model, how the response of domestic aggregate food prices to an international shock depends on features of the country’s income distribution. The model is based on a dichotomy between traded and purely domestic goods. Households prefer the traded good which they substitute towards as their incomes increase, thus exposing themselves to world market price swings. Price transmission from international to domestic markets therefore increases with per capita income but also with income inequality. Model predictions are tested on aggregate food price data and results are found to corroborate the theory. 

The second paper estimates the relative contribution of regional and global shocks to changes in domestic food prices in 105 countries over the period 1995-2010 within a dynamic latent factor model framework using a Bayesian simulation methodology. Three main findings emerge from the analysis. Firstly, it seems that domestic rather than global or regional shocks are the main drivers of domestic food prices in all regions. Secondly, global factors have gained importance since 2005. Food inflation in especially Latin America as well as in parts of Europe and Asia has recently become more affected by global shocks. Thirdly, African countries across the continent have food price dynamics that are almost entirely idiosyncratic and global shocks have not gained in importance there.

The third paper studies food inflation in eight major Asian rice countries with an emphasis on the 2008 rice crisis. First we establish that although several of these countries successfully curbed domestic rice price increases, food price stability in general did not follow. Then, we estimate country specific models of the real food price process based on which dynamic forecasts and historical decompositions are calculated. Results indicate that, despite the low degree of pass-through from international to domestic rice prices, food prices in general grew as fast as expected or faster, given the surge on the international commodity markets.

The fourth paper argues that subsidy programmes can have a destabilizing effect on a country’s inflation in times of surging commodity prices if these lead to chronic public deficits. In the empirical analysis we compare the recent inflation experiences of Egypt, which has an extensive food and fuel subsidy programme, and Senegal which does not subsidize domestic prices.  We show that prices in Egypt did indeed increase much faster than in Senegal and also faster than a model based on historical (low and stable) prices would predict. Price changes in Senegal, on the other hand, evolved much more in line with the model’s predictions.

Principal Supervisor

Professor Henrik Hansen, Department of Economics, University of Copenhagen

Assessment Committee

• Professor Niels Kærgård, Department of Food and Resource Economics, University of Copenhagen (chairman)
• Professor Christian M. Dahl, Department of Business and Economics, University of Southern Denmark
• Professor Allan Matthews, Department of Economics, School of Social Sciences and Philosophy at Trinity College Dublin, Ireland