A multivariate approach for identification of optimal locations with in Ethiopia’s wheat market to tackle soaring inflation on food price (Extended version)

Using Johansen (1998 and 1991) vector error correction model and related extensions optimal locations where effective stabilization intervention can be done are identified. It is found that producer centers of Shashimiene and Bale Robe and Deficit market of Jimma are the locations where effective stabilization of wheat price can be done with least cost. However the national wheat market seems to have better capacity to process shocks coming from deficit markets and central markets than surplus markets. So targeting surplus markets, though effective in long run, can result on short run increase in volatility. Moreover, even though, distance could be one factor determining the inclusion of additional markets in to the rule of one price, it was not found to be the main factor in Ethiopian wheat markets. This implies that in highly imperfect market cointegration may not be solely related to distance only. Other factors like the level of market failures and the development of complementary institutions may influence the level of cointegration. Fortunately the search procedure for boundary of markets operating under rule of one price followed by earlier papers, though theoretically unsound is observed to work in Ethiopia wheat markets.