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May 25th, 2016

Trading-off volatility and distortions? Food policy during price spikes

Published by Food Policy Journal,

This paper in the Food Policy journal analyses the trade-off between price distortions and reduced volatility when governments intervened in agricultural and food markets during the recent food price spikes and concludes that there is much room for policy improvement. The authors develop a model to derive how much distortions a government would introduce when it cares about price stability in a situation with limited policy options and show that there is a trade-off and identify the optimal combination of distortions and stability for given international price shocks and interest groups preferences for stability. The theoretical findings are compared with empirical indicators on actual government interventions in staple food markets. The authors conclude that several countries have been able to reduce (short run) price volatility in the domestic markets while at the same time allowing structural (medium and long term) price changes to pass through to producers and consumers. However, this is not the general case. For many countries, even when explicitly taking into account the trade-off (and the benefits of reducing volatility) government policies appear far removed from the optimal trade-off and there appears to be opportunities for policy improvement.

Curated from sciencedirect.com