Food Prices and the Multiplier Effect of Trade Policy

49 Pages Posted: 2 Jun 2015

See all articles by Paolo E. Giordani

Paolo E. Giordani

LUISS "Guido Carli" University

Nadia Rocha

World Trade Organization

Michele Ruta

Economic Research Division, WTO; Columbia Business School - Economics Department; International Monetary Fund (IMF)

Date Written: September 2014

Abstract

This paper studies the relationship between trade policy and food prices. We show that, when individuals are loss averse, governments may use trade policy to shield the domestic economy from large food price shocks. This creates a complementarity between the price of food in international markets and trade policy. Specifically, unilateral actions give rise to a "multiplier effect": when a shock drives up the price of food, exporters respond by imposing restrictions while importers wind down protection, thus exacerbating the initial shock and soliciting further trade policy activism. We test the key prediction of the theory with a new dataset that comprises monthly information on trade measures across 77 countries and 33 food products for the period 2008-11, finding evidence of a multiplier effect in food trade policy. These findings contribute to inform the broader debate on the proper regulation of food trade policy within the multilateral trading system.

Keywords: Food prices, Commodity price shocks, Trade policy, Econometric models, Loss aversion, Multiplier effect, Food crisis., domestic price, world price, global trade, import tariff, import subsidy, export supply, import demand, export taxes

JEL Classification: F13, F59, Q02, Q17

Suggested Citation

Giordani, Paolo E. and Rocha, Nadia and Ruta, Michele, Food Prices and the Multiplier Effect of Trade Policy (September 2014). IMF Working Paper No. 14/182. Available at SSRN: https://ssrn.com/abstract=2613294

Paolo E. Giordani (Contact Author)

LUISS "Guido Carli" University ( email )

Viale Romania 32
Roma, Roma 00197
Italy

Nadia Rocha

World Trade Organization ( email )

Rue de Lausanne 154
CH-1211 Geneva
Switzerland

Michele Ruta

Economic Research Division, WTO ( email )

Rue de Lausanne 154
CH-1211 Geneva
Switzerland

HOME PAGE: http://www.iue.it/Personal/Fellows/MicheleRuta/Welcome.htm

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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