Archive for June 22nd, 2010

What explains the rise in volatility of food prices?

June 22, 2010

IMF economist Shaun Roache in this paper says:

The macroeconomic effects of large food price swings can be broad and far-reaching, including the balance of payments of importers and exporters, budgets, inflation, and poverty. For market participants and policymakers, managing low frequency volatility—i.e., the component of volatility that persists for longer than one harvest year—may be more challenging as uncertainty regarding its persistence is likely to be higher.

This paper measures the low frequency volatility of food commodity spot prices using the spline- GARCH approach. It finds that low frequency volatility is positively correlated across different commodities, suggesting an important role for common factors. It also identifies a number of determinants of low frequency volatility, two of which—the variation in U.S. inflation and the U.S. dollar exchange rate—explain a relatively large part of the rise in volatility since the mid-1990s. 

 Interesting approach. Breaking up volatility as low frequency and high frequency and seeing what explains latter. Am wondering could we use the same approach for calculating inflation as well? We usually exclude food and fuel from headline to get core. Could we instead just seperate high volatile food items from headline? This is particularly important for India (and other developing) where food forms bulk of the basket. We have these trimming inflation from Dallas and Cleveland Fed but they exclude hugh volatile items in general.

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June 22, 2010

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