The effect of price support policies under productivity shocks: evidence from an economywide model

Many developing countries have implemented price support policies for cereals, but their effects on production, prices, and welfare remain unclear. Using an economywide model calibrated with data from Ethiopia, we analyze the impacts of various producer and consumer price support policies in situations when agricultural productivity changes. We find that producer price support policies can stimulate output, but limit declines in consumer prices and thus work against the urban poor and rural net-buyers of cereals. By contrast, consumer price stabilization policies implemented in times of decreased agricultural productivity tend to further shrink agricultural incomes. Moreover, these policies cause a substantial reduction in domestic cereal production, further exacerbating food insecurity. Our findings suggest that price support policies could have a range of unintended economic consequences and, thus, governments should conduct rigorous ex ante policy impact assessments before their implementation.