Food Price Volatility in Developing Countries - the Role of Trade Policies and Storage

The quest for the causes of food price volatility has produced a large body of literature examining whether financialization of commodity markets, the new nexus with energy markets, or restrictive trade policies prompted food prices to change so extremely (Abbott et al., 2011; Serra and Gil, 2012; Tadesse et al., 2013). Increasing volatility in international markets are a great concern for developing countries. However, surprisingly, there are not many new insights on the causes of food price instability at domestic markets in developing countries. Several papers have analyzed the transmission of international price changes to domestic markets finding mixed evidence with regard to inter-linkages between international and national level (Minot, 2011; Baquedano and Liefert, 2014). In contrast to pure time-series approaches, reduced form equation models that control for market fundamentals and policy variables consistently find a positive volatility spill-over from international to national markets (Lee and Park, 2013; Kornher and Kalkuhl, 2013; Pierre et al., 2014). This literature also provides evidence on the impact of prominent supply and demand factors as well as the importance of transaction costs and governance indicators. Our analysis is situated between time series approaches and structural models by estimating a dynamic panel specification with a large set of explanatory variables.