The transmission of world commodity prices to domestic markets under policy reforms in developing countries

Abstract

This paper examines the degree to which world price signals have been transmitted into domestic prices for eight countries and ten commodities, a total of 31 country/commodity pairs. The main characteristic of these countries was that they all undertook substantial policy reforms during the mid‐1980s to early 1990s. The paper investigates the effect of reforms on the speed at which signals were transmitted to domestic markets and on the extent of price transmission. We find that Chile, Mexico, and Argentina are the only countries whose domestic commodity markets were integrated with world markets. For the remaining cases (Ghana, Madagascar, Indonesia, Egypt, and Colombia) in only a few country/commodity pairs is there some passthrough of world price changes. In terms of the effects of policy reforms, in the majority of the cases the hypothesis of a structural break following the reform year is rejected.