Liberalization and food price distributions: ARCH-M evidence from Madagascar

There is no well-articulated theory of how stochastic food prices respond to economic liberalization measures, a surprising oversight in the vast literature on market-oriented reforms, This paper presents reduced form estimates of the effects of liberalization measures on food commodity prices in Madagascar using autoregressive conditional heteroskedastic in mean (ARCH-M) methods, The data indicate that the short-term effects of liberalization on the mean and variance of food prices vary substantially by commodity, region and season, In the long term, liberalization increases both the mean and the variance of food prices, The abandonment of a quantity-rationed state marketing system with administrative pricing also leads to smaller inter-regional and interseasonal differences in mean food prices and a sharp increase in price autocorrelation. Real exchange rates have pronounced positive effects on mean food prices, but these effects emerge indirectly, rather than directly, through induced changes to border parity prices, (C) 1997 Elsevier Science Ltd.