Journal of Agricultural and Applied Economics, 43,1(February 2011):95110

2011 Southern Agricultural Economics Association

Food Price Volatility and Macroeconomic

Factors: Evidence from GARCH and
GARCH-X Estimates
Nicholas Apergis and Anthony Rezitis
This article examines food price volatility in Greece and how it is affected by short-run
deviations between food prices and macroeconomic factors. The methodology follows the
GARCH and GARCH-X models. The results show that there exists a positive effect between
the deviations and food price volatility. The results are highly important for producers and
consumers because higher volatility augments the uncertainty in the food markets. Once the
participants receive a signal that the food market is volatile, this might lead them to ask for
increased government intervention in the allocation of investment resources and this could
reduce overall welfare.
Key Words: relative food prices, volatility, macroeconomic factors, GARCH and GARCHX models
JEL Classifications: E60, Q10, Q19

Over the recent past, food prices increased dramatically, leading to much debate about the end
of cheap food period. This type of food crisis
has serious implications for ecological sustainability, for the role of international financial institutions, and for the risk of future nutritional
emergencies. In rich countries, food covers a
relatively small part of a households budget; by
contrast, in poor countries, households use a
large share of their income for food expenses,
implying that food price increases lead to reduced real income as well as to higher risks of

Nicholas Apergis is professor, Department of Banking

and Financial Management at the University of
Piraeus, Piraeus, Greece. Anthony Rezitis is associate
professor, Department of Farm Organization and Management, University of Ioannina, Agrinio, Greece.
We express our gratitude to the Editor of this
Journal as well as to two referees for their patience
along with their constructive and valuable comments
on an earlier draft of this paper. Needless to say, the
usual disclaimer applies.

malnutrition and higher uncertainty (volatility)

in food markets, because food price inflation
severely stresses the most vulnerable groups.
Nevertheless, these international prices for the
major food types have decreased almost just as
dramatically as they had increased, exacerbating the magnitude of food price volatility. This
decline in food prices accompanies the dramatic fall in international economic activity
resulting from the global economic slowdown.
However, a report by the FAO (2009) shows
that food prices have remained sticky in many
countries, implying that they remain at high levels.
As a result, many low-income countries and, especially, households continue to be adversely affected by high levels of food prices.
Factors such as the role of financial speculation in food commodity markets along with
global financial markets turmoil, export bans,
adverse weather conditions, precautionary demand for food stocks, lack of efficient logistics
systems, infrastructure for food marketing and

96

Journal of Agricultural and Applied Economics, February 2011

distribution, rising energy prices, and energy

intensity of the agricultural sector, the diversion
of certain food commodities to produce alternative fuel, and political factors through policy
inadequacies, weak institutions that undermine
incentives for agricultural production, input
subsidies, and involvement of public agencies
in food imports have received criticisms about
their contribution to such an uncertain food
market environment. Certain empirical studies
identify that unexpected trading volumes in
commodity futures trading lead to higher cash
price volatility (Sahi and Raizada, 2006; Yang,
Balyeat, and Leatham, 2005), whereas Gilbert
(2008) finds weak evidence that such speculative
activities could influence food prices. Campiche
et al. (2007) and Thompson, Meyer, and Westhoff
(2009) report evidence in favor of the impact of
oil prices on production costs, whereas the reverse route is nonoperative. Furthermore, Irwin
and Good (2009) provide evidence that a new era
of crop price volatility has begun with considerable uncertainty about the new level of average
nominal prices causing great stress to market
participants. They also state that the change in
crop markets today is comparable to those during
the mid-1970s and they anticipate that market
participants will adjust to the new pricing environment with surprising speed. Von Braun and
Torero (2009) identify two major explanations
behind the 20072008 international food price
crisis; first, the ad hoc trade policy interventions
such as export bands or high export tariffs or high
import subsidies, and second, the significant flow
of speculative capital from financial investors
into agricultural commodity markets. They also
suggest several changes in regulatory frameworks
to reduce speculation in food commodities. Finally, Harri, Nalley, and Hudson (2009) report
that not only higher costs of producing energy
from food products, but also greater use of oilbased inputs in food markets have generated
higher food prices. By contrast, Yu, Bessler, and
Fuller (2006) provide empirical evidence that oil
price shocks have a relative small effect on food
prices. The presence of mixed results is an argument against using oil prices as an explicit
determinant of food prices in this study.
Conceicao and Mendoza (2009) argue that
lack of investments in the agricultural sector is

the most critical factor for food price increases.

Roache (2010) finds that the macroeconomic
variables that really matter for food price volatility are inflation and exchange rates. In addition, he argues that the presence of such high
food price volatility has made the required policy
responses more challenging, whereas it seems
to have added an extra nebulous to investment
and consumption decisions made by businesses
and households, respectively.
This high increase in food prices (both in mean
and in volatility) is eliciting policy responses that
exacerbate rather than cushion price volatility as
policymakers rush to restrict exports, control domestic prices, and attempt to rebuild stocks in the
face of price increases. Macroeconomic instability
has real sectoral effects, but it retains the case that
there is no predictable direction in which real farm
prices are affected by general inflation. Grennes
and Lapp (1986), using annual data, consider the
extent to which macroeconomic factors that
generate inflation systematically alter relative
agricultural prices. They could not reject the
hypothesis that real aggregated agricultural prices have not been altered by the level of money
prices, inflation, or exchange rates. They argue,
however, that the use of monthly data, for example, might show temporary relative price effects, as is shown by the studies of Chambers
(1984), using monthly data, and Chambers and
Just (1982), using quarterly data. Gardner (1981)
and Grennes and Lapp (1986) argue that an
economic environment that generates changes
in its components is expected to trigger substantial price swings, whereas Chambers (1985)
exemplifies the fact that food products are less
storable than nonfood products, resulting in
higher relative price variability. Blisard and
Blaylock (1993) also report empirical results
that lend support to the argument that food
price volatility exhibits strong swings over time
and, thus, these prices should not be included
in the estimation of general price inflation, i.e.,
only core inflation matters for economic policy
evaluation.
Recent contributions on food prices have also
emphasized the role of certain macroeconomic
factors and policies such as monetary, fiscal, trade,
and exchange rate policies in the formulation
of agricultural price policy (Gray, 1992; Kargbo,

Apergis and Rezitis: Food Price Volatility and Macroeconomic Factors

2000). Barnett, Bessler, and Thompson (1983),

Chambers and Just (1982), and Schuh (1986)
demonstrate that the increases of food prices in
the U.S. economy during the 1970s are considerably the result of macroeconomic factors. The
identification of such factors increases the efficiency in the use of inputs of production as well
as the availability of food products, allowing
final consumers to purchase those food products
at affordable prices.
Meyers et al. (1986) and Taylor and Springs
(1989) exemplify the role of exchange rates in
determining agricultural prices. Exchange rates
can affect food prices mainly through the mechanism of international purchasing power and the
effect on margins for producers with non-U.S.
dollar costs (Gilbert, 1989). Taylor and Springs
(1989) and Tegene (1990) find substantial effects
from monetary factors on agricultural prices,
whereas Kliesen and Poole (2000) argue that
monetary policy can affect the agricultural sector only in an indirect way by contributing to
low inflation, stable inflation expectations, and
low interest rates. By contrast, Bessler (1984),
Isaac and Rapach (1997), Orden (1986), and
Orden and Fackler (1989) show that monetary
impacts were not the dominant factors for food
prices. Interest rates can also affect food prices,
especially if market participants expect interest
rate shocks to persist (Frankel, 2006).
Other empirical studies have already identified a relationship between expected inflation
and changes in relative prices of particular
products (Ball and Mankiw, 1992; Lach and
Tsiddon, 1993; Loy and Weaver, 1998; Mizon,
1991; Smith and Lapp, 1993; Stockton, 1988).
Moreover, higher food prices mean higher
inflation and, given the large weight of food
prices in the Consumer Price Index, inflation
will rise as a result of persistent food price
increases, leading to higher wages and causing
inflationary expectations to become embedded in economies. Inflation is also expected to
reduce real consumption, savings, and investments, all of which may combine to slow down
aggregate demand and, thus, to dampen economic
activity. Calvo (2008) and Frankel (2008) argue
that the link between food prices and macroeconomics is mainly the result of the global financial crisis linked with excess liquidity in global

97

economies and nourished by low interest rates,

especially set by the G7 central banks along
with high economic growth figures in China
and India. Attie and Roache (2009) and Leibtag
(2008) provide empirical support to the argument that commodities can be largely used as
hedging investment portfolios against inflation
risk. They exemplify the role of food price volatility in affecting the portfolio choices of financial
investors.
The empirical analysis has concentrated on
revealing any relationship between food prices
and macroeconomic factors in terms of the means
of the variables under investigation; however, in
terms of volatility, it has remained rather silent.
Macroeconomic factors could potentially affect
food price volatility through certain channels,
leading to persistent changes in supply and demand conditions in food markets. In case that
these factors exemplify the volatility of food
prices, this could create higher uncertainty about
future food prices and, thus, participants in food
markets and academics may attribute any changes
in the mean and the volatility of food prices to
such factors or events. This type of uncertainty
about food prices, in turn, could affect both producers and consumers decisions as well as any
investment activity in the food industry. In addition, if the volatility of macroeconomic factors
does seem to play a substantial role in determining
the volatility of food prices, then policymakers
should take it into consideration in formulating
price and income programs for the agricultural
sector. With volatility at high levels, uncertainty
delays or cancels investments and changes in
consumption that would have been more likely
with more stable prices.
Monetary factors, i.e., money supply, are
linked to food prices through certain mechanisms such as the foreign exchange markets in
which financial resources move among global
economies. More specifically, the Greek economy is considered a small open economy well
integrated on a global basis. As a result, monetary
policy changes could affect food prices through
real exchange rates that measure the external
competitiveness of an economy. Thus, changes
in such rates transform the structure of relative
prices between tradable goods and nontradable
goods with agricultural products belonging to

98

Journal of Agricultural and Applied Economics, February 2011

the first group (Jaeger and Humphreys, 1988).

The impact of fiscal policy activities on food
prices is realized through an indirect mechanism. In particular, fiscal management affects
not only the course of domestic interest rates
(Gale and Orszag, 2003; Hauner and Kumar,
2006; Modigliani and Jappelli, 1988) as well as
exchange rates (Canzoneri, Cumby, and Diba,
2001; Daniel, 1993, 2001; Dupor, 2000), but
also domestic inflation and the course of current account; such fiscal actions could have a
substantial impact on the demand for the products of various sectors in the economy, including
agricultural products (Kargbo, 2005).
For the case of the Greek economy, certain
degrees of inflation rates in the nonfarm economy, large shocks in inputs prices, e.g., feed
grains, high competition from other European
Union (EU) countries along with the changes of
the Common Agricultural Policy (CAP), resulted
in highly volatile food prices over the last two
decades (Apergis and Rezitis, 2003). In particular, CAP reforms caused significant decreases in
intervention prices and induced compensation to
producers through direct payments, which are
not related to the level of production, causing
higher food price volatility. Moreover, GATT
changes might have caused higher food price
volatility, because they have fostered more intense international competition through limiting
support programs to agriculture. The aforementioned arguments are supported by the study of
Yang, Haigh, and Leatham (2001), which examines the effect of liberalization policy on agricultural commodity price volatility in the United
States and finds that liberalization policies caused
an increase in price volatility for wheat, soybeans,
and corn.
Very few studies have investigated the role
of macroeconomic factors in the process of relative food prices in Greece. Daouli and Demoussis
(1989) find that over the period 19671987, price
support policies resulted in neutralizing the impact of inflation on Greek agriculture. Our study,
however, contributes to the relevant literature by
extending such empirical work and investigating
the impact of more macroeconomic factors on
food prices. After all, inflation is always a phenomenon that reflects macroeconomic developments and such developments have been quite

(positively) crucial in the Greek economy following the Maastricht Treaty. Varangis (1992),
through the methodology of Autoregressive Conditional Heteroscedasticity (ARCH) models, finds
that money supply developments strongly affect
the volatility of food prices. Maravegias (1997)
argues that the manner in which the exchange
rate policy has been implemented, relative to the
evolution of the general price index, seems to
have had a direct effect on the prices Greek
farmers received. At the same time, the efforts of
Greek policymakers since the mid-1980s to reduce substantially high inflationthrough the
implementation of a strict monetary policy that
led to high interest rateshave also exerted a
substantial impact on food prices (Maravegias,
1997). Zanias (1998) identifies a role for macroeconomic factors that seems to have a substantial
impact on Greek inflation, which, in turn, alters
food prices. He claims that macroeconomic instability contributes to higher food price volatility,
which in turn has adverse effects on agricultural
production and income. Finally, Hondroyiannis
and Papapetrou (1998) examine the relation
between money supply and agricultural prices
over the period 19721994. Their results show
that money supply changes can affect agricultural prices through the mechanism of interest
rates.
The objective of this article is to investigate
the manner short-run deviations from the relationship between food prices and macroeconomic factors that drive food price volatility in
Greece. Therefore, when volatility is increased
as a result of shocks in the system, it is reasonable to investigate the behavior of conditional
variance as a function of short-run deviations
from the equilibrium path. The accurate measurement of food price volatility is important
not only because volatility causes uncertainty to
producers, consumers, and policymakers, but
also costs are inevitably incurred (McMillan,
2003). A significant positive effect would imply
that short-run deviations affect not only the conditional mean, but also the conditional variance,
implying that the further food prices deviate from
macroeconomic variables in the short run, the
harder they are to predict. In other words, conditional heteroscedasticity could be modeled as a
function of lagged error correction terms affected

Apergis and Rezitis: Food Price Volatility and Macroeconomic Factors

by macroeconomic conditions in case that disequilibrium measured by such error correction

terms is responsible for uncertainty measured by
the conditional variance. A significant effect indicates these terms have potential power in modeling the conditional variance of food prices.
Therefore, last periods equilibrium error has a
significant impact on the adjustment process of
the relevant variables. In this case, a positive effect of the short-run deviations on the conditional
variance implies that as the deviation between
food prices and macroeconomic variables gets
larger, the volatility of food prices increases
and prediction becomes harder. Thus, given
that short-run deviations from the long-run
relationship between food prices and macroeconomic variables may affect the conditional
variance, then they will also affect the accuracy
of such predictions. The empirical findings
would be of value to commodity market participants as well as to policymakers.
The methodology followed in this article to
measure relative food price volatility is that
of Generalized Autoregressive Conditional Heteroscedastic (GARCH) models introduced by
Bollerslev (1986). Chou (1988) argues in favor
of GARCH models on the grounds that they are
capable of capturing various dynamic structures of conditional variance, of incorporating
heteroscedasticity into the estimation procedure,
and of allowing simultaneous estimation of several parameters under examination. Finally, the
methodology of the GARCH-X models, introduced by Lee (1994), is also followed. This
model allows the link between short-run deviations from a long-run cointegrated relationship
and volatility. Whether it is stronger in providing better and more reliable forecasts is
still an issue in dispute. Nevertheless, the literature offers a great variety of models that
can be used to forecast food prices and food
price volatility. According to Kargbo (2007),
such techniques include exponential smoothing, ARIMA modelling, Vector Autoregression
(VAR), and Vector Error-Correction Models. In
general, forecasting food prices through an adequate model seems to be more than a necessity
considering the importance of food policy reforms
performed by many (especially, low-income)
economies.

99

The remaining text of this article is organized as follows. The next section describes
the methodology used, whereas the following
section presents the empirical analysis and
discusses the empirical results. The final section concludes the article.
The Methodology of GARCH and
GARCH-X Models
The ARCH methodology, pioneered by Engle
(1982), suggests a method for measuring uncertainty if it is serially correlated. The empirical
methodology used here extends the ARCH model.
Let xt be a models prediction error, b a vector
of parameters, and xt a vector of predetermined
explanatory variables in the equation for the conditional mean:
(1)

yt 5 xt b 1 xt

xt jWt1 ; N0,ht

where ht is the variance of xt, given information

W at time t 2 1. The GARCH specification, as
developed by Bollerslev (1986), defines ht as:
(2)

ht 5 u0 1

p
X
i51

ci hti 1

q
X

aj x2 ti

j51

with u0, aj, and ci being nonnegative parameters.

The parameter u0 indicates volatility acting as a
floor, which prevents the variance from dropping
below this level (Staikouras, 2006). According
to equation (2), the conditional variance ht is
specified as a linear function of its own lagged
p conditional variances and the lagged q squared
residuals. Engle and Bollerslev (1986) and
Lamoureux and Lastrapes (1990) have argued
P
P
that if
ci 1
aj 5 1, then the GARCH
specification turns into an integrated GARCH
(IGARCH) process, implying that current shocks
persist indefinitely in conditioning the future
variance. Maximum likelihood techniques are
used to estimate the parameters of the GARCH
model according to the BHHH algorithm (Berndt
et al., 1974). According to Lamoureux and
Lastrapes (1990), the GARCH model may provide biased estimates of persistence in variance
in case that additional information arising from
other factors is unaccounted for. Therefore, we
proceed to present an augmented version of the
traditional GARCH model, which is known as

100

Journal of Agricultural and Applied Economics, February 2011

the GARCH-X model. This model takes into

consideration the effects of the short-run deviations on the conditional variance. In this respect,
the specification equation (2) becomes:
(3)

ht 5 u0 1

p
X

ci hti 1

i51

q
X

aj x2 ti 1 g 1 z2 t1

j51

Moreover, in terms of persistence, like in the case

of the GARCH model, for the GARCH-X model
P
P
to be stationary, we need:
ci 1
aj < 1. We
i

also need: u0 > 0 and all ci and aj 0 for i 5

1, . . ., p and j 5 1, 2, . . ., q. i. . .,j
The short-run deviations are denoted by the
squared and lagged error-correction term zt212.
This term, known as the Error Correction (EC)
term, acts as a proxy for the residuals from a
cointegrating vector that associates food prices
and certain macroeconomic variables and it is
believed to have important predictive powers
for the conditional variance of food prices. The
parameter g 1 indicates the effects of the short-run
deviations between the macroeconomic variables
from a long-run cointegrated relationship on the
conditional variance of the residuals of the food
prices equation. If g 1 is positive, this implies that
food prices become more volatile and possibly
less predictable as the deviation of food prices
from certain macroeconomic factors gets larger.
In other words, the presence of such deviations in
the conditional variance may be exploited to get
more precise and reliable confidence intervals
for forecasts of food prices. According to Hwang
and Satchell (2001), the GARCH-X model is
simple but includes additional information, visa`-vis the GARCH model, on some important
factors such as the macroeconomic deviations
of the economy as they are captured by the
deviations from the macroeconomic equilibrium
path.
Empirical Analysis

divided by the population index,1 the real exchange rate (RE) measured as the real effective
exchange rate index (1995 5 100), and the budget
deficit (or surplus) to income ratio (DEFY). The
effective exchange rate is defined in such a manner as a decline in the ratio to be consistent with a
real appreciation of the domestic currency. Deficit, money supply, and food prices are divided
by the Gross Domestic Product deflator. In this
manner, the real deficit to income ratio (RDEFY),
real money balances (RM), and relative food
prices (PP), respectively, are obtained. Data
span the period 19852007 and are obtained
(except that on food prices) from the Research
Department of the Bank of Greece. Food prices
are described as an index of producer prices of
agricultural products (1995 5 100) and they are
obtained from the Eurostat NewCronos database. Note that an index of producer prices received by farmers for food items is not available
for the period under consideration, whereas a
price index was necessary to capture the price
behavior of the whole food sector. Moreover, a
price index at the producer price level was used
and at the consumer price level because the former does not include imports.
The period coincides with the period in
which Greece has been a full member of the EU
(European Economic Community), whereas important economic policy incidents occurred. For
empirical purposes of the study, a dummy variable is considered that is related to the reforms
adopted with respect to the implementation of the
CAP that occurred in May 1992. The reform of
the CAP decreased price support for farmers and
increased direct income support. As Ray et al.
(1998) argue, however, our data set cannot be
used to determine the portion of price variability
that could be attributed to the CAP reform and
policy changes instituted in the 1992 CAP Treaty.
The original data are seasonally unadjusted.
However, a certain number of researchers have

Data
The empirical analysis is carried out using
monthly data on food prices proxied by producer
prices (prices received by farmers), money supply defined as M1, income per capita (YPOP)
defined as the ratio of industrial production index

1 The per-capita GDP or GNP for Greece is available on an annual or quarterly basis. In the present
article, we used monthly data to estimate the proposed
models. To this end, we used the industrial production
index instead of the per capita GDP or GNP, which is
available on a monthly basis. The share of industrial
sector in GDP of Greece is approximately 20.3%.

Apergis and Rezitis: Food Price Volatility and Macroeconomic Factors

reported that using seasonally unadjusted data

and then applying certain statistical techniques
to account for seasonality, i.e., seasonal unit
roots or seasonal dummies, generates incorrect
signs or statistically insignificant estimates (Lee
and Siklos, 1991; Osborn, 1990). Thus, our data
set is seasonally adjusted through the X11 procedure. This procedure is based on the assumption that the original series are composed of
seasonal, trend, cycle, trading date, and irregular
components. The procedure estimates each component of the original series in an iterative process, which makes extensive use of moving averages and a methodology for identifying and
replacing extreme values in the data set before
providing final estimates of the components of
the adjusted series. Throughout the article, lower
case letters indicate variables expressed in logarithms. Finally, RATS6.1 software (provided by
Estima, US) assists the empirical analysis.
Integration Analysis
We first test for unit root nonstationarity by using
the Augmented Dickey-Fuller (ADF) test proposed by Dickey and Fuller (1981). The lag length
is determined through the general-to-specific
method presented by Perron (1997). Table 1 reports the results. The hypothesis of a unit root is
not rejected for the variables of real deficit to
income ratio, real money supply, the real exchange rate, income per capita, and food prices
at the 5% significance level. When first differences are used, unit root nonstationarity is rejected for all variables under study.
However, the ADF test has received very
strong unfavorable critique as a result of its low

101

KPSS results, using zero, one, two, three, and

four lags, show that the null hypothesis of level
stationarity and trend stationarity is rejected for
all variables under study.
Moreover, to further check the robustness of
unit root test, the efficient unit root tests, proposed by Elliott (1999) and Elliott, Rothenberg,
and Stock (1996), are also reported in Table 1.
These latter tests avoid the problem of shortspanned data. The lag lengths in both efficient
tests remain the same as in the ADF test, whereas
both versions are reported with and without
trend. In all cases and for all variables under
investigation, the empirical findings indicate that
the null hypothesis of stationarity is rejected at
the 5% significance level. Overall, there is consistency in our unit root testing and the presence
of cointegration is valid to be tested.
Cointegration and Error Correction Analysis:
A Mean Equation for Relative Food
PricesCointegration Analysis:
With and without Breaks
Once having identified a set of five jointly dependent stochastic variables integrated of the
same order, i.e., I(1), a VAR model is postulated
to obtain a long-run relationship. Tests developed
by Johansen and Juselius (1990) revealed evidence in favor of cointegration. The results are
reported in Table 2.
Both the eigenvalue test statistic and the
trace test statistic indicate that there exists a single long-run relationship between relative food
prices and the macroeconomic variables under
consideration. The description of the cointegration space yields:

pp 5 0:369 RDEFY  0:174 rm 1 0:146 re 1 0:105 ypop 1 0:0874

4:47*
3:48* 3:72*
3.96*
3:18*

power, especially in small samples. Thus, to increase the power of our unit, root results alternative tests are also used such as the Kwiatkowski
et al. (KPSS, 1992) test in which stationarity is
the null rather than the alternative hypothesis.
These results are also reported in Table 1. The

R2 5 0.73 LM 5 10.44[0.27] RESET 5

13.09[0.32], where pp denotes food prices,
RDEFY denotes the public deficit to income
ratio, rm denotes real money balances, re denotes the real exchange rate, and ypop denotes
income per capita. LM is a serial correlation test

102

Journal of Agricultural and Applied Economics, February 2011

Table 1. Unit Root Tests

ADF Test
Variable
RDEFY
rm
re
ypop
pp
KPSS Test
Variable
RDEFY

Rm

re

ypop

pp

Elliott et al. Test

Variable
RDEFY
rm
re
ypop
pp
Elliott Test
Variable
RDEFY
rm
re
ypop
pp
a

Significant at 5%.

Without Trend
Levels
21.83
22.44
22.03
22.17
22.42

With Trend

First Differences
28.30
25.25
26.38
210.51
210.28

(5)
(7)
(4)
(6)
(3)

(4)a
(4)a
(3)a
(3)a
(2)a

Level Stationarity
1.1983
1.1864
1.1481
1.1184
1.1095
1.1766
1.1468
1.1235
1.0842
1.0655
1.2347
1.2094
1.1541
1.1288
1.1036
1.1847
1.1437
1.1153
1.0964
1.0655
1.2095
1.1764
1.1533
1.1239
1.1052

(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l

5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5

Levels
21.14
20.73
22.16
21.94
22.39

First Differences

20.79
20.64
21.16
21.22
21.38

(5)
(7)
(4)
(6)
(3)

0)
1)
2)
3)
4)
0)
1)
2)
3)
4)
0)
1)
2)
3)
4)
0)
1)
2)
3)
4)
0)
1)
2)
3)
4)

1.3471
1.3277
1.2352
1.1684
1.1172
1.2527
1.2239
1.1540
1.1236
1.1093
1.3544
1.3093
1.2422
1.1981
1.1535
1.2236
1.1874
1.1346
1.1058
1.0861
1.2879
1.2252
1.1879
1.1456
1.1233

(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l
(l

5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5

21.13
20.86
21.41
21.68
21.82

(5)
(7)
(4)
(6)
(3)

First Differences
a

23.79 (4)
23.11 (4)a
24.57 (3)a
24.66 (3)a
23.93 (2)a

Levels
21.25
20.96
21.47
21.71
21.82

(5)
(6)
(7)
(6)
(4)

First Differences
24.15
23.69
24.77
24.80
24.38

(4)a
(5)a
(4)a
(4)a
(3)a

With Trend

First Differences
24.33
23.58
24.83
24.92
24.29

0)
1)
2)
3)
4)
0)
1)
2)
3)
4)
0)
1)
2)
3)
4)
0)
1)
2)
3)
4)
0)
1)
2)
3)
4)
With Trend

Without Trend
Levels

(4)a
(5)a
(4)a
(4)a
(3)a

Trend Stationarity

Without Trend
Levels

28.42
25.76
26.44
28.87
27.21

(5)
(6)
(7)
(6)
(4)

(4)a
(4)a
(3)a
(3)a
(2)a

Levels
21.52
21.07
21.36
21.95
21.99

(5)
(6)
(7)
(6)
(4)

First Differences
24.72
24.13
25.66
25.38
24.68

(4)a
(5)a
(4)a
(4)a
(3)a

Apergis and Rezitis: Food Price Volatility and Macroeconomic Factors

103

Table 2. Cointegration Tests

r
Johansen-Juselius Test
Lags 5 10
r50
r1
r2
r3
r4

n-r

r
r
r
r
r

5
5
5
5
5

1
2
3
4
5

m.l.

95%

Tr

95%

42.8940
29.2280
12.5041
8.5881
3.0285

37.0700
31.0000
24.3500
18.3300
11.5400

96.2427
53.3487
24.1207
11.6166
3.0285

82.2300
58.9300
39.3300
23.8300
11.5400

Saikkonen and Lutkepohl Test

Lags 5 9
r50
r51
r52
r53
r54

32.47
4.58
1.39
0.95
0.27

[0.026]
[0.197]
[0.304]
[0.426]
[0.587]

r, number of cointegrating vectors; n-r, number of common trends; m.l., maximum eigenvalue statistic; Tr, Trace statistic. Figures
in brackets denote p values. The number of lags was determined through Likelihood Ratio tests developed by Sims (1980).

and RESET is a model specification test. Numbers in parentheses denote p values. Both tests
identify the adequacy of our model.
However, in May 1992, critical changes
occurred in the CAP implementation. Thus, a
dummy variable (with values of zero up to 1992:4
and one thereafter) that captures the restructuring
conditions of this CAP policy change is also considered in the cointegrating vector. The Saikkonen
and Lutkepohl (2000) test with a break at 1992:4 is
used to test for any possible break shift of the
cointegration vector. This test rejects the null
hypothesis of no cointegration. The results of
this test incorporating this shift are also reported
in Table 2. These findings also provide evidence
in favor of cointegration between the variables
under study. The new cointegration vector yields:

1. The hypothesis that relative food prices are

cointegrated with a set of macroeconomic variables such as real public deficit, real money
supply, the real exchange rate and per capita
income is accepted.
2. All macroeconomic variables exert a statistically and significant effect on relative food
prices.
3. Real public deficits, the real exchange rate,
and the per-capita income exert a positive
effect on relative food prices, whereas real
money supply exerts a negative effect on
those prices.
4. Finally, these results are valid with and
without the presence of a structural break
occurred in May 1992 under the CAP
restructuring.

pp 5 0:395 RDEFY  0:213 rm 1 0:174 re 1 0.159 ypop 1 0.104

4:33*
4:05*
3:95* 4:11*
3:63*

R2 5 0.81 LM 5 12.56[0.31] RESET 5 14.55[0.36]

To summarize, the analysis of the long-run
structure of the data, in terms of stationary
cointegration relations, provides the following
findings:

The Short-run Structure

Having established the presence of a cointegrating relationship between relative food prices,
on the one hand, and the real deficit-to-income

104

Journal of Agricultural and Applied Economics, February 2011

ratio, real money balances, the real exchange

rate, and income per capita on the other hand
(and based on the equation that considers the
structural break event), a parsimonious error
correction vector autoregressive mechanism is
considered, which adds the residuals from the
cointegrating vector. The analysis yields the
following estimates:

in general, and food inflation, which is

a major component of overall inflation, in
particular. The root cause of such link seems
to be the reckless deficit spending that fiscal
authorities have resorted to over the period
under study.
3. Finally, the CAP restructuring event continues to exert a negative impact on relative

Dpp 5 0:389 Dpp4 1 0:12 Dpp5 1 0:212 Dpp8 1 0:494 DRDEFY1  0:0392 DRDEFY2
5:54*
2:77*
2:93*
4:61*
3:07*
1 0:0231DRDEFY3  0.151 Drm4 1 0:168 Dre8 1 0:078Dypop3 1 0:072 Dypop4
2:17*
3:57*
3:82*
2:15*
3:01*
1 0:236 Dypop6 1 0:154 Dypop7 1 0:094 Dypop8  0:418 EC1  0:19 CAP
6:29*
3:94*
3:47*
5:02*
2:86*

R2 5 0:89 LM 5 1:530:22 RESET 5 0:019

 0:89 NO 5 3:140:21 HE 5 2:30:13
ARCH1 5 2:620:03 ARCH12 5 2:150:02

where EC is the error correction term, figures in

parentheses denote t-statistic values, whereas
figures in parentheses denote p values. An asterisk indicates significance at 5%. CAP is the
dummy variable capturing the restructuring
conditions of the CAP policy in May 1992. For
the empirical purposes of this section, an 8-lag
VAR model was used. The lag selection criteria
were based on Akaikes information criterion
and Schwarzs information criterion. However,
only the variables that turned out to be significant are reported. The dominant features of the
estimated model are:
1. Relative food price adjustment to deviations
from disequilibria is rather fast, i.e., the estimated speed of adjustment parameter is 0.42.
2. The short-run effect of real public deficit is
rather strong. The same also holds for percapita income, whereas the short-run effect
of real money balances as well as of the real
exchange rate is relatively low. Fiscal policies seem to exert a more powerful effect on
relative food prices than policies based on the
monetary spectrum. In other words, fiscal
policy seems to feed overall inflation trends

food prices even in

findings imply that
to lower food prices
competitive in the
market.

the short
the CAP
to render
internal

run. These
reform led
them more
and world

The estimated model satisfies certain diagnostics such as absence of serial correlation
(LM), absence of misspecification (RESET),
presence of normality (NO), and absence of
heteroscedasticity (HE). However, it suffers
from the presence of ARCH effects, even at the
first lag. The ARCH tests indicate the presence
of volatility clustering in relative food prices.
They suggest the use of the GARCH methodology as the appropriate approach to generate
both consistent estimates of the mean equation
and to describe the evolution of the variance of
relative food prices.

GARCH and GARCH-X Estimates

On the basis of parsimony criteria, GARCH
models are considered as a special case of an
ARMA process (Tsay, 1987). Therefore, through
a Box-Jenkins methodological procedure, a
GARCH(1,1) model exhibits the best fit. Higherorder GARCH formulations added no significant
improvements in goodness of fit. The results
yield the following estimates:

Apergis and Rezitis: Food Price Volatility and Macroeconomic Factors

105

Dpp 5 0:391 Dpp4 1 0:058 Dpp5 1 0:108 Dpp8 1 0:415 DRDEFY1

13.2*
2.49*
3.34*
13.4*
0:0189 DRDEFY2 1 0:0161 DRDEFY3  0.205Drm4 1 0:114Dre8 1 0:043Dypop3
3:86*
4:28*
5:89*
3:27*
2:85*
1 0:074 Dypop4 1 0:239 Dypop6 1 0:166 Dypop7 1 0:098 Dypop8  0:107 EC1
6.28*
14.1*
11.2*
6.34*
7.76*
0:29 CAP
6:16*
ht 5 0:00357 1 0:506hti 1 0:232 xti 2
13.4*
7.88*
10.6*

Function value (the log likelihood) 5 1377.17

with xt being the residuals from the EC
model and figures in parentheses denoting
t-statistics. Similarly, a GARCH-X(1,1) model
is identified, which yields the following
estimates:

important result is that although the persistence

measure remains less than one, it is higher with
the inclusion of the EC term, implying that
denoting explicitly the macroeconomic shocks
leads to higher persistence effects on food price
volatility.

Dpp 5 0:306 Dpp4 1 0:123 Dpp5 1 0:045 Dpp8 1 0:424 DRDEFY1  0.0399 DRDEFY2
2.56*
3.32*
2.18*
4.96*
3.97*
1 0:0298 DRDEFY30:148 Drm4 1 0.283Dre8 1 0:168Dypop3 1 0:056Dypop4
4:59*
5:96*
5:05*
3:08*
5:99*
1 0:279 Dypop6 1 0:209 Dypop7 1 0:129 Dypop8  0:131 EC1  0:205 CAP
5.03*

3.34*

4.89*
xti2

ht 5 0:00428 1 0:531hti 1 0:255

11.6*
4.51*
7.42*

5.12*

3.97*

1 0:0806 ECt12
10:5*

Function value (the log likelihood) 5 2459.24

with EC being the deviations (the residuals)
from the cointegrating vector. Figures in parentheses denote t-statistics. The coefficient on
the EC term is positive and statistically significant, indicating a direct relationship between volatility and short-run deviations. These
findings imply that prediction of food prices
may become a difficult task as the deviation of
that series from macroeconomic factors increases
in the short run. In this case, effective policy
formulation could be also turn to be a difficult
task in the short run. In terms of the Likelihood
Function value, the GARCH-X(1,1) model outperforms the standard GARCH(1,1) model,
whereas all coefficients in the model satisfy
the nonnegativity condition. Finally, another

Alternatively, we can test the superiority of

either model based on nonnested or encompassing tests for volatility models suggested
by Chen and Kuan (2002) and Engle and Ng
(1993). In particular, we consider an LM test,
which is based on a minimal nesting model that
considers the T  R2 form. The idea is to construct a model that encompasses both alternatives; the extended model is an augmented model
that has as a special case, either the regular
GARCH model or the GARCH-X model. When
we test the adequacy of the GARCH model
against the adequacy of the GARCH-X model
and vice versa, the p value in the former test turns
out to be 0.02, which rejects the null hypothesis
that favors the GARCH model, whereas the same
test yields a p value of 0.34, which accepts the

106

Journal of Agricultural and Applied Economics, February 2011

null hypothesis and supports the GARCH-X

model. Thus, the GARCH-X model fits the data
substantially better than the regular GARCH
model.
A Robustness Test
The goal of this subsection is to quantify food
price volatility with a different type of the
GARCH model, i.e., with the Exponential
GARCH model (EGARCH) or the asymmetric

The exponential nature of the EGARCH ensures that the conditional variance is always
positive even if the parameter values are negative; thus, there is no need for parameter restrictions to impose nonnegativity. The parameter
g captures the asymmetric effect, whereas the
parameter b captures persistence. The model is
estimated using the robust method of BollerslevWooldridges quasimaximum likelihood estimator assuming the Gaussian standard normal
distribution. The results yield:

Dpp 5 0:287 Dpp2 1 0:146 Dpp3 1 0:102 Dpp5 1 0:406 DRDEFY1  0.136 DRDEFY1
3.05*
3.61*
3.44*
3.87*
4.16*
1 0:095 DRDEFY2  0:155 Drm2 1 0.261Dre6 1 0:179Dypop2 1 0:135 Dypop2
4:16*
4:67*
4:67*
3:58*
5:47*
1 0:292 Dypop4 1 0:227 Dypop3 1 0:157 Dypop5  0:157 EC1  0:245 CAP
5.53

3.62*

4.36*

4.68*

4.26*

ht 5 0:0258 1 0:248jxt1 =ht1 j 1 0:176 xt1 =ht1 1 0:753 ht12

10.4*
3.25* 5.62*
7:36*

GARCH model, to capture certain characteristics

of food prices such as an alternative measure of
persistence and asymmetric effects. This model,
suggested by Nelson (1991), can successfully
model asymmetric impacts of good news and
bad news on food price volatility with high levels
of accuracy. According to this model, the natural
logarithm of the conditional variance is allowed
to vary over time as a function of the lagged error
terms rather than lagged squared errors. This
model is more advantageous than the original
GARCH model because, first, it allows for the
asymmetry in responsiveness of food price
volatility to the sign of shocks to food prices
and, second, does not impose the nonnegativity constraints on parameters. Although this
model has been extensively used to quantify
volatility in various money, financial, and exchange rate variables, to our knowledge, it has
not been examined yet to examine food price
volatility. The EGARCH(1,1) model can be
written as:
(4)

ln ht2 5 w 1 ajxt1 =ht1 j 1 gxt1 =ht1

1 b ln ht12

Function value (the log likelihood) 5 2125.73

The results report that the persistence in
volatility is higher than the original GARCH
model but lower than its counterpart in the
GARCH-X model case. Moreover, the asymmetric effect is positive and statistically significant, indicating the presence of an asymmetric
impact of good and bad news on food price
volatility. In particular, these results suggest
that unanticipated increases in food prices lead
to food price volatility increases more than in
the case of unanticipated decreases in food
prices.
Conclusions and Policy Implications
This article investigated the behavior relative
food price volatility and the potential effects of
short-run deviations between relative food prices and specific macroeconomic factors on
food price volatility in Greece. The empirical
analysis used the methodology of GARCH and
GARCH-X models. Short-run deviations were
proxied by the EC term from the cointegration

Apergis and Rezitis: Food Price Volatility and Macroeconomic Factors

relationship between relative food prices and

certain macroeconomic variables such as real
money balances, real per-capita income, the
real exchange rate, and the real deficit-to-income ratio. The results from a GARCH-X(1,1)
model showed that a significant and positive
effect is imposed by those deviations on the
volatility of relative food prices. Moreover,
although persistence remains less than one, the
inclusion of macroeconomic shocks gets them
closer to permanency. It remains an avenue for
future research to examine whether similar results could be confirmed across different country
groups.
The implications of these findings are quite
critical for the future course of food prices
because it relied on the course of the macroeconomic environment, especially now with
the current problematic fiscal position of the
Greek economy playing the dominant role in
the countrys macroeconomic environment. An
increase in price volatility implies greater uncertainty about future prices, because the range
in which prices might lie in the future becomes
wider. As a result, producers and consumers
can be affected by increased price volatility,
because it augments the uncertainty and the
risk in the market. Increased price volatility can
reduce the accuracy of producers and consumers forecasts of future food prices, thereby
causing welfare losses to both producers and
consumers of food commodities. It is also crucial for policymakers to be aware of the degree
of price volatility so as to be able to adopt appropriate hedging strategies. Thus, from a policy
standpoint, the results are important, because
once the participants receive a signal that the
food market is too volatile, it might lead them to
call for increased government intervention in the
allocation of investment resources and this could
not be a welfare improvement factor. However,
the global economic crisis may complicate the
resolution of many of these macroeconomic factors such as public deficits and public debts. Thus,
tighter credit and fiscal positions will make it
more difficult to finance the massive investments
needed in the agricultural sector to enhance food
security, especial for low-income households.
In addition to these recommendations, additional certain actions must be also implemented

107

as to alleviate the impact of the macroeconomic

environment on food price uncertainty such as
encouragement of financial institutions to expand
operations rapidly to improve access of farmers
to credit and the encouragement by the Greek
authorities of significant increases in investments
in adaptive research and technology dissemination (though the current situation in the Greek
economy makes the feasibility of such efforts
extremely doubtful).
[Received April 2010; Accepted July 2010.]

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