The Macroeconomic Effects of International Food Price Shocks on China

ABSTRACT This paper examines the macroeconomic effects of disruptions in global food commodity markets on China, the largest developing country. Using a structural VAR model with unanticipated harvest shocks as an external instrument, we find that a 10% exogenous increase in international food prices results in a persistent 1.5% decline in China's real GDP. The CPI rises by 1.2% at its peak but falls below its original level after three years. Both consumption and investment experience significant declines, highlighting the sensitivity of China's economy to international food price shocks. These shocks account for over 10% of output fluctuations, underscoring their critical role in China's economic dynamics. Extending the analysis to a time‐varying parameter VAR model with stochastic volatility, we discover that the transmission of international food price shocks was particularly pronounced during the high‐inflation period of the late 1980s. Over time, however, this transmission weakened, stabilising after the millennium. These findings shed light on the evolving macroeconomic implications of global food price disruptions for China's economy.