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Do oil prices drive food prices? The tale of a structural break

Fernando Avalos ()

Journal of International Money and Finance, 2014, vol. 42, issue C, 253-271

Abstract: It is frequently argued that biofuel (and ethanol) promotion policies in the United States have created a link between oil and corn prices that has accentuated the recent rally in the price of that crop and its substitutes (especially soybeans). Even though it is intuitively appealing, one problem with this hypothesis is that ethanol policies have been in place in the US for more than 35 years, whereas the run up in food prices dates back only to 2006. However, a significant change in US biofuel policy during that year provides an adequate framework to test for the existence of a structural break in the stochastic properties of the corn and soybean price processes. The results show that structural stability is rejected, and the transmission of oil price innovations to corn prices has become stronger after 2006 (no changes with respect to soybeans). There is also a significant transmission of corn price innovations to oil and soybean prices. Moreover, the data show evidence of a previously non-existent cointegration relationship between oil and corn prices.

Keywords: Oil price; Food price; Corn price; Soybean price; Ethanol; Biofuel (search for similar items in EconPapers)
JEL-codes: H23 O13 Q16 Q48 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.jimonfin.2013.08.014

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