Dissanayake, D M Jagath Rohitha
Motivated by recent food price spikes, this thesis examines three issues relating to international prices of agricultural commodities. It focuses on the three most important food commodities in the world from a calorie viewpoint, namely wheat, rice and maize. Following the introductory chapter, Chapter 2 presents an overview of the determinants of agricultural commodity prices. Chapter 3 analyses political economy causes of trade policy interventions in response to commodity price spikes to...[Show more] reveal why governments alter trade interventions in order to cushion domestic prices from external shocks. To examine how much countries insulate their domestic markets from international markets, Chapter 4 estimates price transmission elasticities for wheat, rice and maize by employing a novel estimation approach. The first essay (Chapter 2) probes demand and supply shocks in global grain markets. Using annual data from 1961 to 2012, price fluctuations for wheat, rice and maize are decomposed into three components: supply shocks, demand shocks and other shocks. The ""other shocks"" here include policy responses of some governments, such as export restrictions and panic purchases when prices spike upwards. The chapter estimates how much each of these shocks contributed to the evolution of grain prices during the last half century. The results suggest that supply and demand shocks have contributed very little to price fluctuations, compared to other shocks. The other shocks seem to have exacerbated exogenous price rises due to a supply shortfall, particularly in periods when prices spike. The second essay (Chapter 3) studies the implications of reference dependence and loss aversion features of individual preferences in trade policy determination and shows that these behavioural features help explain why governments change their trade restrictiveness in order to cushion domestic prices from international price shocks. We show that this change comes irrespective of whether special interest groups are lobbying the government. Using a global dataset on agricultural price distortions, we find the available empirical evidence is consistent with our model predictions. The empirical evidence further suggests that governments' reactions to international prices are stronger for staple food items than for non-staples. A voluminous literature has estimated price transmission from international to domestic markets, ignoring unobserved common factors that affect all domestic markets. In the third essay (Chapter 4), this thesis estimates long-run and short-run transmission elasticities of world commodity price shocks to domestic markets using a framework that takes into consideration common factors that are correlated with regressors. The estimates are based on an annual panel dataset for rice, wheat and maize for both developed and developing countries over the period 1960-2007. The results from the common factor framework are compared to those that do not account for common factors. The findings suggest price transmission elasticities for rice, wheat and maize are around 0.4, 0.5 and 0.75 respectively. The findings suggest that ignoring common factors is likely to result in upwardly biased estimates of price transmission elasticities. The final chapter of the thesis (Chapter 5) contains a summary of the findings of the three main chapters in the thesis.
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