Poverty and Price Transmission

This paper analyzes the relationship between international and domestic food prices in a stylized economic model. The model is based on the empirically sound principle of quality substitution and a dichotomy between traded and domestic goods. Households are equipped with preferences which make them substitute towards the traded variety as their income rise. Price transmission therefore increases with per capita income but also with income inequality. Model predictions are tested on aggregate food price data covering the 2007-8 and 2010-11 periods. Estimated effects are qualitatively in line with the model's predictions as well as being statistically and economically significant.