Modeling the Effect of Food Price Volatility and Transmission to Market Efficiency and Welfare in the East African Community

Abstract

This paper adopts and explains the application of panel vector autoregressive (PVAR) and spatial panel vector autoregressive (SPVAR) models to investigate the effects of food price volatility and transmission on welfare and efficiency in the East African Community (EAC). Our results show that it takes time for spatial effects to influence prices in the markets; they also show that price volatility and transmission are more predictable in models predicted with spatial effects than in those predicted without spatial effects. The variance decomposition results show that 100 percent variations caused by a one unit shock in the prices of cereals in one market creates strong variations reverberate both in the short-term and long-term in the prices of cereals in other markets across EAC. This paper suggests that on the one hand agricultural policies should focus on ensuring crop yield stability and enhancing regional food distribution systems in order to stabilize food prices and reduce food market inefficiencies across the EAC in particular and ensure and improve regional food access in general. On the other hand, trade policies should be formulated considering the gains of trading with the near-neighboring markets in order to avoid delayed spatial effects on price volatility and transmission.