THE ANDEAN PRICE BAND SYSTEM: EFFECTS ON PRICES, PROTECTION AND PRODUCER WELFARE

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Second, the variance decomposition results (not shown) indicate that for the entire
1990-1998 period, exchange rate fluctuations have had a generally greater weight in
determining domestic price variability than have world price fluctuations (exceptions are
sugar prices in all three countries and maize prices in Ecuador). Once we compare the
periods before and after the introduction of the APBS, the picture changes substantially.
As shown in Figures 2 and 3, real exchange rate instability decreased sharply in
Colombia and Ecuador after 1995, leaving world market prices with a dominant effect on
domestic price instability (compared to exchange rate variability). In Venezuela,
however, the persistent instability of the real exchange rate induced domestic price
instability that was unable to be buffered by trade policies. Overall, the APBS has been
least effective in stabilizing prices in Venezuela, where its effects have been offset by the
real exchange rate which generated a high level of instability throughout the late 1990’s.

A third interesting result from the variance decomposition results (Villoria, 2000)
is the positive covariance between real exchange rates and international prices. This
positive co-variability indicates that declining international prices have coincided with an
appreciation in real exchange rates (and vice versa). Thus, in addition to a loss in
competitiveness induced by appreciated real exchange rates, domestic goods have had to
compete with cheaper imports. Conversely, these same results would imply that higher
world prices have, at least on occasion, been reinforced by a depreciated real exchange
rate.

Turning to the estimates of trade protection, Table 2 shows the coefficients of
nominal protection for each product in each country before and after the introduction of
the APBS. The estimated t-values test the equality of means. In all cases, the degree of

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