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Output Effects of Global Food Commodity Shocks

Bilge Erten () and Kerem Tuzcuoglu ()

Journal of Globalization and Development, 2018, vol. 9, issue 1, 18

Abstract: The dramatic fluctuations in global food prices over the past two decades have generated significant concern about their destabilizing macroeconomic effects. While the pass-through effects of international food prices on domestic prices have been widely documented, these estimates have not taken into account reverse causality, omitted variable bias, or differences in sources of international food price fluctuations. We use sign restrictions to identify relevant demand and supply shocks that explain the volatility in global food prices. We quantify their dynamic effects on several components of food exporters’ and food importers’ domestic output, including household consumption, government consumption, investment, and net exports. Our findings reveal that identifying the sources of the shocks driving global food prices is crucial to evaluating their domestic effects. Expansions in global economic activity that increase global food prices stimulate the domestic output of both food-importing and food-exporting economies; however, disruptions in global food commodity markets that lead to rising real food prices have large contractionary effects for food importers due to deteriorating trade balances and falling household consumption. We also document that the adverse effects of unfavorable global food shocks on household consumption are greater for food-importing countries with relatively high shares of household food expenditures and large food trade deficits.

Keywords: domestic output effects; global demand shocks; Global food prices; oil shocks; sign restrictions; transmission mechanisms (search for similar items in EconPapers)
JEL-codes: E31 E32 F14 F32 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:bpj:globdv:v:9:y:2018:i:1:p:18:n:4