Food price changes, domestic price insulation, and poverty (when all policymakers want to be above average)

International prices of storable foods tend to be volatile, with occasionally intense but short-lived spikes and relatively long periods of below-average prices. Because movements in the domestic prices of staple foods are politically sensitive – not the least because they may push more households into poverty – many governments intervene to reduce the volatility of these prices by insulat ing their markets from changes in international prices. While this action can be effective in reducing the volatility of domestic prices in reactive countries, the collective impact of these interventions is to increase the volatility of world prices (Anderson and Nelgen 2012; Martin and Anderson 2012; Jensen and Anderson 2015), thereby increasing domestic price volatility in some more open countries. Thus, the only way that price insulation can be effective in reducing poverty is if the countries that insulate most are those in which the poor are most vulnerable to price spikes, something which Anderson, Ivanic, and Martin (2014) found not to be the case during the food price crisis of 2007–8.