Food inventory policies under liberalized trade

This paper evaluates the role of food inventories or buffer stocks in stabi lizing prices of foodgrains in India when private external trade in grain i s liberalized. The model adopts a multi-market equilibrium framework with t he direction of trade determined endogenously. World prices are assumed to be sensitive to the amount traded by India (the 'large country' effect). Th e simulation results demonstrate that holding foodgrain inventories is an i nefficient mechanism for stabilizing domestic prices under liberalized trad e. Variable levies/ subsidies on trade appear to be more cost effective. Fr eeing of trade lowers domestic price variability even though world prices a re more volatile. (C) 2001 Elsevier Science B.V. All rights reserved.