Food Prices and the Multiplier Effect of Trade Policy

IMF Working Papers, September 26, 2014

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Authors: Paolo Giordani, Nadia Rocha, Michele Ruta
Date: September 26, 2014
Core thesis: When individuals are loss averse, governments may use trade policy to shield domestic economies from large food price shocks. This behavior generates a complementarity between international food prices and trade policy, producing a "multiplier effect" whereby unilateral policy responses amplify initial shocks.

Theoretical mechanism:
- Loss aversion at the individual level induces governments to adjust trade policy to protect domestic consumers from food price shocks.
- A complementarity arises between the international price of food and trade policy: higher international prices can trigger policy changes that further affect world markets.
- Unilateral actions create a "multiplier effect": when a shock drives up the price of food, exporters may impose restrictions while importers reduce protection, exacerbating the initial shock and prompting additional trade policy activism.
Empirical evidence:
- New dataset comprises monthly information on trade measures across 77 countries and 33 food products for the period 2008-11.
- The empirical analysis finds evidence consistent with the predicted multiplier effect in food trade policy.

Data coverage:
- 77 countries
- 33 food products
- Monthly frequency
- Period: 2008-11
Approach:
- The paper combines a theoretical model (loss aversion driving policy responses) with empirical testing using the constructed monthly panel of trade measures to test the model’s key prediction.

The findings inform the broader debate on regulation of food trade policy within the multilateral trading system.
Implication: Unilateral trade policy responses to food price shocks can be self-reinforcing and may exacerbate international price volatility, suggesting a role for coordinated multilateral regulation to mitigate multiplier effects.