The effects of purchasing and price subsidy policies for agricultural products under target zones

a r t i c l e i n f o A good harvest usually leads to a collapse of agricultural prices since the price elasticity of agricultural products is relatively low. To stabilize the market and protect farmers, many countries have introduced a target zone policy, together with product purchasing or price subsidy strategies. This article analyzes the effect of a target zone with different strategies operating in a coordinated manner. The results show that a target zone policy with agricultural product purchases does not necessarily stabilize agricultural product wholesale prices, but is able to stabilize manufacturing product prices, if the price effect is smaller than the sum of the wealth and asset effects for agricultural products and the price effect is larger than the interest rate effect for manufacturing products. On the contrary, a target zone policy with an agricultural product price subsidy will generate the " honeymoon effect " for agricultural product wholesale prices, but will result in unstableperformance of manufacturing product prices. The biological characteristics of agricultural products, together with their lower supply and demand elasticity and climate sensitivity, give rise to a relatively high degree of variation in agricultural prices, which will hurt farmers' income and damage the economy. Even though there is evidence suggested limited success of price band provisions and stockholding obligations in reducing the volatility of the commodity prices (e.g. Gilbert, 2011), most governments, including those of developed and developing countries, adjust their agricultural prices using stabilization policies and support policies (Helmberger and Chavas, 1996). For example, Loening et al. (2009)suggest the authorities to make policies taking into account the cereal sector so as to reduce the impact of agricultural supply shocks on domestic inflation; Chen et al. (2013)argue that the target zone policy can stabilize the agricultural product wholesale price and the farmer's nominal income; Bellemare et al. (2014)conclude that price stabilization yields net welfare gains in rural Ethiopia. How to keep a stable price has been one of the central issues in the field of agricultural economics. Quiggin and Anderson (1981) suggest the authority to stabilize the agricultural price by using buffer stock scheme or buffer fund scheme. A buffer stock scheme raises the price by decreasing the market supply through purchasing and storing an excess of agricultural products. When there are economic shortages and consequently a higher agricultural price in the economy, these stores are sold. Instead of the …