We study the Purchasing Power Parity (PPP) hypothesis and the PPP puzzle for a sample of seventeen OECD economies when real exchange rates (RERs) are subject to multiple structural breaks. Applying recent panel econometric methods, we first show that RERs are found to be I(1) non-stationary processes when the analysis neglects structural breaks, while they are characterized as I(0) stationary stochastic processes when structural breaks are accommodated. This indicates that ignoring structural breaks can lead to model misspecification, which can bias (upward) shocks’ persistence measures. After controlling for structural breaks, our half-life point estimates appear below one year for both idiosyncratic and common measures of persistence of deviation from the changing mean.
Import-dependent arid Arab micro-states such as those in the Persian Gulf are particularly vulnerable to food-security risk. Among the many remedial policy suggestions, some initiation or increase in domestic production is to insulate these countries from supply disruption, import price volatility, and high import prices. This article does not address the efficacy of domestic production but notes that such production will require government intervention in the form of production subsidies to mitigate market risk. The narrow focus of this article is to provide a conceptual structure of subsidies that avoids many previous problems in established subsidy systems. The model has two components: a calculation of the true economic cost of a unit of an agricultural product and a deficit payment that is calculated to bridge the gap between true economic cost and market remuneration. The structure of the deficit payment is crucial to the establishment of a beneficial incentive system but the article is limited to a few of many possible options. The deficit-payment option we suggest makes the most use of market signals, avoids perverse incentives, and provides a structure to encourage efficiency, quality enhancement, and product differentiation in agricultural products. The system is designed to be WTO compliant. A detailed numerical example is used for the economic price and simple analytics, and numeric examples are used to illustrate the incentive effects of deficit payments.
Using Qatar as a case study, we exploit a novel micro-data set for 102 raw agricultural imported commodities on a shipment-by-shipment basis over the period January 1, 2005 to June 30, 2010. The data comprise over half a million individual observations, with a very rich set of characteristic specifications. Several interesting initial results emerge from the analysis. First, we find evidence of import-price volatility far in excess of world price volatility across a wide spectrum of commodities. Second, supply origins for virtually all commodities are highly concentrated. In many cases, commodities are sole sourced. Third, although less so, concentration is evidenced among Qatari importing companies for certain commodities. Fourth, we notice anomalies that lead to inefficient shipping methodologies and associated increased costs. The paper concludes by providing an empirical illustration of hedonic price modeling for barley followed by guidance for future empirical research.