Spillover effects of world oil prices on food prices: evidence for Asia and Pacific countries

Abstract

This study investigates the mean and volatility spillover effects of World oil prices on food prices for selected Asia and Pacific countries including Australia, New Zealand, South Korea, Singapore, Hong Kong, Taiwan, India and Thailand. The research employs vector autoregression (VAR) and GARCH-family models using daily observations for the 2 January 1995 to 30 April 2010 period, splitting the data into two subsamples 1995-2001 and 2002-2010. The major empirical findings of the study are as follows. World oil prices positively influence food prices of the selected countries both in mean and in volatility, though the magnitudes of effects differ from country to country for different time periods. The effects are found mostly in the short run but not in the long run. Stronger mean and volatility spillover effects are found for the more recent subsample period suggesting increasing interdependence between World oil and Asia Pacific food markets in recent times. In terms of mean spillover effects net food importer countries’ food price show stronger effects to the shocks, whereas in terms of volatility spillover effects no distinction in absorbing the World oil shocks can be made between exporters and importers. The findings suggest that oil prices should be taken into consideration in policy preparation and forecasting purposes for food prices.