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

In countries such as those studied here, domestic price variability may be a function not
only of international price variability and domestic factors, but of chronic exchange rate
variability. Following the approach of Quiroz and Valdés (1993), we decompose the
variance of the logarithm of real domestic prices of each product in each country for both
time periods (as well as the entire 1990-1998 period) into the variance of the logarithm of
three major components: real world prices (PW*), real exchange rates (E*), and a term, φ,
representing other factors, which as Quiroz and Valdés suggest, include import tariffs,
other trade barriers, and the effects of domestic agricultural policies:

Var (log P )= Var (log PW )+ Var (log E * )+ Var (φ )+
2[c0v(log PW, log E* )+ Cov(log PW, φ )+ Cov(log E*, φ )] ɑ

The relative importance of each of the factors in explaining the variance of the logarithm
of each domestic price series is obtained through a) estimating the variance
decomposition equation (2), and then b) calculating the relative share of total variance of
PD* which is explained by the variance of each component. In the case of latter results,
reported below, covariance effects are omitted; however, in the detailed variance
decomposition estimates, these effects are included (see Villoria, 2000). These estimates
enable us to obtain a general picture of the relative importance of each component of
price variability, notably the real exchange rate.

Nominal Price Protection

In order to assess the extent to which the APBS works as a trade protection mechanism,
nominal protection coefficients are estimated for each commodity in each country. The
NPC is equal to the ratio of the domestic price (PD) of a commodity to its border price
(PW) using the official exchange rate (E):

<<   3   4   5   6   7   8   9   >>

More intriguing information