Abstract
We use a bivariate Vector Error Correction model to assess the transmission of price signals from selected international food markets to developing countries. We introduce a Generalized Conditional Autoregressive Heteroscedasticity (GARCH) effect for the model’s innovations in order to assess volatility spillover between the world and domestic food markets of Ethiopia, India and Malawi. Our results point out that short-run adjustment to world price changes is incomplete in Ethiopia and Malawi, while volatility spillovers are significant only during periods of extreme world market volatility. The problem in these countries is one of extreme volatility due to domestic, rather than world market shocks. In India, the analysis supports relatively rapid adjustment and dampened volatility spillovers which are by large determined by domestic policies.
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Notes
- 1.
Forecast error variance decomposition for the domestic price yields the contribution of the variance of international prices to the domestic prices and the part of the variance that is purely attributable to shocks in the domestic price.
- 2.
The bi-directional Granger causality between the Indian and world prices does not allow meaningful forecast error variance decomposition.
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Rapsomanikis, G., Mugera, H. (2011). Price Transmission and Volatility Spillovers in Food Markets of Developing Countries. In: Piot-Lepetit, I., M'Barek, R. (eds) Methods to Analyse Agricultural Commodity Price Volatility. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-7634-5_10
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