Is a Public Regulation of Food Price Volatility Feasible in Africa? an Arch Approach in Kenya
Abstract: The 2007-2008 food crisis and current food price swings led economists to re-evaluate the potential for policy instruments to manage food price volatility. Despite a consensus on the need for a price volatility regulation, we have to recognize the actual difficulty for many countries to achieve a reasonable price stability. Drawing from the case of maize prices in Kenya, we show that the ability of a stabilization policy to lower food price volatility does not depend on the nature of the policy instrument only, but also on the institutional conditions of its enforcement. The predictability of the policy for economic agents appears key factor of price stability. To test this, we elaborate an autoregressive conditionally heteroskedastic model of price determination in which prices and prices volatility are jointly estimated, using monthly data over the 1994-2009 period in Kenya. We find that policy predictability -approximated by the import tariff policy stability - decreases price volatility, whereas the stock level does not appear to play a significant role on volatility. Our results appeal for a better integration of institutional conditions in the analysis of food prices stabilization policies.