The Determinants of Food Prices: A Case Study of Pakistan

Controlling prices is one of the major tasks for the macroeconomic policy-makers. The recent oil price hike that shifted the policy towards biofuels and some natural calamities increased food prices around the world. This paper analyses the dema nd- and supply-side factors that affect food prices in Pakistan. Long-run relationship is analysed using the Autoregressive Distributed Lag Model (ARDL) for the period 1970 to 2008. The result indicates that supplyside factors (subsidies and world food prices) have a significant impact on food prices , whereas demand-side factors, such as money supply, are the main cause of the increase in food prices in the short as well as the long run. The error correction is statistically significant and shows that market forces play an active role to restore the long-run equilibrium.