Agricultural Price Shocks and Business Cycles - A Global Warning for Advanced Economies

For a panel of 75 countries, we find that increases in global agricultural commodity prices that are caused by unfavorable harvest shocks in other regions of the world significantly curtail domestic economic activity. The effects are much larger than for average global agricultural price shifts. The impact is also considerably stronger in high-income countries, despite the lower shares of food in household expenditures these countries have compared to low-income countries. On the other hand, we find weaker effects in countries that are net exporters of agricultural products, have higher shares of agriculture in GDP or lower shares of non-agricultural trade in GDP; that is, characteristics that typically apply to low-income countries. When we control for these country characteristics, we find indeed that the effects on economic activity become smaller when income per capita is higher. Overall, our findings imply that the consequences of climate change on advanced economies are likely larger than previously thought.