Food Price Crises and the Insulation of Domestic Grain Markets

Abstract

Studies that analyze the transmission of food prices from international to domestic markets for large sets of countries and products assume that price relationships are time-invariant. However, studies that look in detail at individual countries and products show that countries respond to increasing international food prices with measures that increase the insulation of their domestic markets and thus weaken international-to-domestic price transmission. We analyze relationships between international prices and a large set of domestic prices for wheat, yellow and white maize, and rice using a smooth-transition error correction model. This specification relaxes the assumption of time-invariant price transmission by allowing price relationships and domestic market insulation to vary over time depending on international price levels. The results confirm that international-to-domestic price transmission weakens in many countries during periods of high international prices, such as 2007/08 and 2022. Our findings highlight a collective action problem: as more countries insulate, the global trading system's capacity to buffer shocks diminishes, amplifying volatility and food security risks.