Optimal Food Price Stabilization in a Small Open Developing Country

This paper analyzes food price stabilization policies in a small, open, developing country. Without public intervention, price dynamics are driven by domestic productive shocks and international prices. Trade and/or storage policies are optimally designed to increase welfare, in a context where consumers are risk-averse and markets are incomplete. An optimal storage policy on its own is detrimental to consumers, since its stabilizing benefits leak into the world market. In contrast, optimal combination of storage and trade policies results in a powerful stabilization of domestic food prices. Such a policy mix includes export restrictions, which are harmful to export partners, but to refrain from using them is costly and entails substantial transfers from consumers to producers.