The Macroeconomic Challenges of Swings in Global Food Commodity Prices

• Applicant: Professor Dr. Sebastian Rüth
• Subject Area: Economic Policy, Applied Economics
• Term: since 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 553457937

This research proposal aims to contribute to the “New Climate-Economy Literature” by examining international agricultural market fluctuations and their impact on advanced economies. Specifically, it focuses on shifts in global food commodity prices triggered by exceptional weather conditions in key food-producing regions of the world. The commodities under consideration are wheat, corn, rice, and soybeans. The first subproject examines whether time-varying interactions between global agricultural markets and macroeconomic conditions exist for advanced economies. Specifically, its aim is to quantify time variation in the macroeconomic effects of weather-related surges in food prices for the U.S., the U.K., the Euro area, and Japan. The analytical framework is an econometric model that accounts for economic instabilities and that incorporates a rich set of domestic and global panel data. To address endogeneity concerns, instrumental variable strategies relying on unpredictable changes in harvest volumes and exceptional weather events will serve as instruments for structural identification. This approach isolates exogenous price movements, providing a clean causal interpretation. The project aims to establish novel facts on the historical reaction of monetary policy to food market disruptions and to estimate time-varying reactions of and transmission mechanisms via key macro aggregates in advanced economies. The second subproject explores the distributional consequences of food market disruptions. Using granular administrative data from Norway, it will analyze how global food price fluctuations affect income, consumption, and saving across households’ asset distributions. The project aims to provide structural estimates of marginal propensities to consume following agricultural price surges, thereby informing theoretical models that feature household heterogeneity. By focusing on weather-induced harvest variations in other regions of the world, the proposed research captures indirect effects of climate change on advanced economies through global agricultural markets; therefore, it complements a growing literature that addresses direct impacts of weather and climate-related disturbances on economic outcomes. The overall objective of the proposal is to quantify macroeconomic challenges posed by weather-induced fluctuations in agricultural prices. Establishing causal evidence on this subject is crucial for practical policy across various spheres, including monetary policy, fiscal policy, public food programs, and trade policies. The findings will inform policy designs to better prepare for and respond to climate-related disruptions in food supply, ultimately contributing to more effective economic stabilization strategies.

• DFG Programme: Research Grants