Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Optimal food price stabilisation in a small open
developing country
Christophe Gouel1
1 World
Sébastien Jean2
Bank (DECRG) – CEPII
2 INRA
– CEPII
IATRC annual meeting
December 11, 2011
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
1 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Motivation
Large use of trade policies in the two recent food price spikes
(evidence of counter-cyclical agricultural trade policies, Andersen
& Nelgen, 2010):
Exporters have used export restrictions to isolate their markets.
Many importers move their tariffs to reduce their domestic price
volatility.
Very non-cooperative policies but potentially quite effective at
stabilising domestic prices.
Large use of stocks
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
2 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Motivation
Large use of trade policies in the two recent food price spikes
(evidence of counter-cyclical agricultural trade policies, Andersen
& Nelgen, 2010):
Exporters have used export restrictions to isolate their markets.
Many importers move their tariffs to reduce their domestic price
volatility.
Very non-cooperative policies but potentially quite effective at
stabilising domestic prices.
Large use of stocks (but not always in the good direction).
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
2 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Motivation
Policy advice from economists: don’t mess up with the price
distribution, go for safety nets!
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
3 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Motivation
Policy advice from economists: don’t mess up with the price
distribution, go for safety nets!
But price stabilization policies will be here for a long time.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
3 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Motivation
Policy advice from economists: don’t mess up with the price
distribution, go for safety nets!
But price stabilization policies will be here for a long time.
This paper takes them seriously and shows what an optimal design of
stabilisation policies implies.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
3 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Motivation
Policy advice from economists: don’t mess up with the price
distribution, go for safety nets!
But price stabilization policies will be here for a long time.
This paper takes them seriously and shows what an optimal design of
stabilisation policies implies.
,→ Understand the motivations for and consequences of using trade
and storage policies for price stabilisation purposes.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
3 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Questions
Normative approach
What is the optimal food price stabilisation policy in a small open
economy when consumers are risk-averse?
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
4 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Questions
Normative approach
What is the optimal food price stabilisation policy in a small open
economy when consumers are risk-averse?
Is increasing buffer stocks a good answer to food price
instability?
What is the optimal combination of trade and storage policy?
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
4 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Questions
Normative approach
What is the optimal food price stabilisation policy in a small open
economy when consumers are risk-averse?
Is increasing buffer stocks a good answer to food price
instability?
What is the optimal combination of trade and storage policy?
→ optimal reaction of a country neglecting the international
consequences of its actions
(6= policy recommendations)
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
4 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Our approach
Model accounting for trade and storage decisions in a stochastic
context with domestic and world yield shocks.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
5 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Our approach
Model accounting for trade and storage decisions in a stochastic
context with domestic and world yield shocks.
With rational expectations
Expectations are endogenous,
Private agents anticipate government’s behaviour and
government accounts for this feedback in its optimal policy
design.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
5 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Our approach
Model accounting for trade and storage decisions in a stochastic
context with domestic and world yield shocks.
With rational expectations
Expectations are endogenous,
Private agents anticipate government’s behaviour and
government accounts for this feedback in its optimal policy
design.
Set-up
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
5 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Our approach
Model accounting for trade and storage decisions in a stochastic
context with domestic and world yield shocks.
With rational expectations
Expectations are endogenous,
Private agents anticipate government’s behaviour and
government accounts for this feedback in its optimal policy
design.
Set-up
Market incompleteness in the storage-trade model. Consumers
are assumed to be risk averse and lack insurance possibilities.
Optimal price stabilisation policies to correct for the
imperfection.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
5 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
The model
Overview
Close to Williams & Wright (1991).
Infinite horizon partial equilibrium model with rational
expectations.
A risk-neutral storer.
A risk-averse consumer.
Inelastic stochastic supply.
International trade (small country assumption).
Normally self-sufficient country.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
6 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
The model
Speculative storer
Classical storage arbitrage equation – Zero-profit condition
St ≥ 0
⊥
β Et (Pt+1 ) +ζt − Pt − k ≤ 0,
| {z }
Rational expectations
with
k unit physical storage cost.
ζt storage subsidy.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
7 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
The model
International trade
Arbitrage at the export and import parity prices
Import parity price
Mt ≥ 0
Xt ≥ 0
⊥
⊥
z }| {
Pt − νtM − (Ptw + τ ) ≤ 0,
(Ptw − τ ) −Pt − νtX ≤ 0,
| {z }
Export parity price
with
Ptw world price generated by a rational expectations storage model.
τ trade costs.
νtM , νtX import and export taxes.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
8 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Dynamics without public intervention
Price behavioural diagrams
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
9 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Dynamics without public intervention
Price behavioural diagrams
1.6
Consumer demand function
1.4
Price
1.2
1
Steady state
0.8
0.6
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
9 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Dynamics without public intervention
Price behavioural diagrams
1.6
Consumer demand function
Price curve with trade only
Price curve
1.4
Price
1.2
← Import parity price
1
Effect of storage →
0.8
0.6
World price : 0.9
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
9 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Dynamics without public intervention
Price behavioural diagrams
1.6
Consumer demand function
Price curve with trade only
Price curve
1.4
← Import parity price
Price
1.2
1
0.8
Export parity price →
0.6
World price : 1
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
9 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Dynamics without public intervention
Price behavioural diagrams
1.6
Consumer demand function
Price curve with trade only
Price curve
1.4
Price
1.2
1
Export parity price →
0.8
0.6
World price : 1.1
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
9 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Dynamics without public intervention
Price behavioural diagrams
1.6
Consumer demand function
Price curve with trade only
Price curve
1.4
Price
1.2
1
Export parity price →
0.8
0.6
World price : 1.2
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
9 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Optimal policy approach
Social welfare function
Partial equilibrium ⇒ Need to carefully account for each agent’s
welfare,
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
10 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Optimal policy approach
Social welfare function
Partial equilibrium ⇒ Need to carefully account for each agent’s
welfare,
Usual practice: sum of surpluses, but fails to account for
risk-aversion,
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
10 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Optimal policy approach
Social welfare function
Partial equilibrium ⇒ Need to carefully account for each agent’s
welfare,
Usual practice: sum of surpluses, but fails to account for
risk-aversion,
Social welfare function (W ), linear combination of consumer’s
utility and other agents’ surplus.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
10 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Optimal policy approach
Social welfare function
Partial equilibrium ⇒ Need to carefully account for each agent’s
welfare,
Usual practice: sum of surpluses, but fails to account for
risk-aversion,
Social welfare function (W ), linear combination of consumer’s
utility and other agents’ surplus.
It is the concavity of the social welfare function introduced by
consumer risk aversion that justifies public intervention.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
10 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Optimal policy approach
Optimisation problem
2 state-contingent instruments of policy:
Trade policy.
Storage subsidy.
Government lacks commitment mechanism. Its policy is discretionary
obeying
∞
X
max Et
β i Wt+i
t=0
subject to the equations defining the recursive equilibrium.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
11 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal trade policy
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
12 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal trade policy
1.6
Without intervention
Trade policy
1.4
Price
1.2
1
0.8
0.6
World price : 0.9
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
12 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal trade policy
1.6
Without intervention
Trade policy
1.4
Price
1.2
1
0.8
0.6
World price : 1
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
12 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal trade policy
1.6
Without intervention
Trade policy
1.4
Price
1.2
1
0.8
0.6
World price : 1.1
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
12 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal trade policy
1.6
Without intervention
Trade policy
1.4
Price
1.2
1
0.8
0.6
World price : 1.2
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
12 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal trade policy
1.6
Without intervention
Trade policy
1.4
Price
1.2
1
0.8
0.6
World price : 1.3
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
12 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Optimal trade policy
Subsidise import at low availability .
Tax export at high availability.
⇒ trim high prices from the distribution.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
13 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Optimal trade policy
Subsidise import at low availability .
Tax export at high availability.
⇒ trim high prices from the distribution.
In reality, we do not see import subsidies so often, but decrease in
import tariffs.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
13 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal storage policy
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
14 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal storage policy
1.6
Without intervention
Storage subsidy
1.4
Price
1.2
1
0.8
0.6
World price : 0.9
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
14 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal storage policy
1.6
Without intervention
Storage subsidy
1.4
Price
1.2
1
0.8
0.6
World price : 1
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
14 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal storage policy
1.6
Without intervention
Storage subsidy
1.4
Price
1.2
1
0.8
0.6
World price : 1.1
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
14 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal storage policy
1.6
Without intervention
Storage subsidy
1.4
Price
1.2
1
0.8
0.6
World price : 1.2
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
14 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal policy with both instruments
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
15 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal policy with both instruments
1.6
Without intervention
Both instruments
1.4
Price
1.2
1
0.8
0.6
World price : 0.9
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
15 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal policy with both instruments
1.6
Without intervention
Both instruments
1.4
Price
1.2
1
0.8
0.6
World price : 1
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
15 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal policy with both instruments
1.6
Without intervention
Both instruments
1.4
Price
1.2
1
0.8
0.6
World price : 1.1
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
15 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal policy with both instruments
1.6
Without intervention
Both instruments
1.4
Price
1.2
1
0.8
0.6
World price : 1.2
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
15 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Optimal policy with both instruments
1.6
Without intervention
Both instruments
1.4
Price
1.2
1
0.8
0.6
World price : 1.3
0.8
0.9
1
1.1
1.2
1.3
1.4
Availability
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
15 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results – Benchmark
Simulated price history
2.0
World price
Export and import parity prices
Domestic price
Price
1.5
1.0
0.5
Year
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
16 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results – Optimal policy
Simulated price history
2.0
World price
Export and import parity prices
Domestic price
Price
1.5
1.0
0.5
Year
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
17 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Benchmark
Trade policy
Storage subsidy
Statistics on the asymptotic distribution
Mean price
1.039
1.003
CV of price
0.150
0.109
Christophe Gouel (World Bank)
Food price stabilisation policies
Both
1.056
0.127
1.029
0.076
Dec. 11, 2011
18 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Results
Benchmark
Trade policy
Storage subsidy
Statistics on the asymptotic distribution
Mean price
1.039
1.003
CV of price
0.150
0.109
Welfare effects
Consumers
Producers
Government
Total
Christophe Gouel (World Bank)
2.47
−2.53
0.12
0.06
Food price stabilisation policies
Both
1.056
0.127
−0.94
1.08
−0.12
0.03
1.029
0.076
1.05
−0.92
−0.03
0.10
Dec. 11, 2011
18 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Conclusion
Characterisation of optimal food price stabilisation policies in a
small open economy.
Stabilisation by storage alone is not desirable because of the
leakage to the world market.
Trade policy is most effective policy instrument.
Strong complementarity of the two instruments.
Food price stabilisation policies entail distributive effects much
larger than the total welfare gains, since welfare effects are
dominated by mean price changes rather than volatility change.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
19 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Perspectives
International policy coordination
Trade policy = non-cooperative policy.
Storage policy: inefficient in open economy for one country, but
as a worldwide policy? How to share the burden of stabilisation
across heterogeneous countries?
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
20 / 21
Introduction
The model
Dynamics without public intervention
Optimal policy approach
Results
Conclusion
Thank you for your attention.
Christophe Gouel (World Bank)
Food price stabilisation policies
Dec. 11, 2011
21 / 21