Food Price Pass-Through in the Euro Area: Non-Linearities and the Role of the Common Agricultural Policy

Abstract

In this paper we analyze the pass-through of a commodity price shock along the food price chain in the euro area. Departing from the existing literature, which focuses on food commodity prices as quoted in international markets, we use a novel database that accounts for the role of the Common Agricultural Policy in the European Union. We model several departures from the linear pass-through benchmark and compare alternative specifications with aggregate and disaggregate data. Overall, when the appropriate data set and methodology are used, it is possible to identify a significant and long-lasting pass-through. The results of our regressions are applied to the food price shock in the 2007–08 period; a decomposition exercise shows that commodity prices are the main determinant of the increase in producer and consumer prices, thus solving the puzzle highlighted in the existing literature for the euro area.