Does Domestic Trade Policy Change Matters For International Price Volatility? Empirical Evidence from Coffee Price in Tanzania

Abstract

For some decades coffee prices have been volatile to the extent of being regarded as one of the attributes that contribute to decline in economic growth in Tanzania despite of various reforms undertaken. This paper attempted to investigate the effect of changes in domestic trade policy and agricultural trade liberalization in Tanzania on the variability of coffee prices overtime. Using the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) framework, the study established that coffee experienced significant price volatility level after the introduction of  agricultural trade liberalization policy in Tanzania during the 1990s and a slight change during the ICA policy regime. The study also finds that persistence of coffee price volatility overtime in both policy regimes displays memory decay. The likely explanation for this is that Tanzania is a price taker and cannot affect the setting of international prices. The policy response to this, include new marketing approach such as promotion and empowering of producers’ groups and revitalization of co-operatives.

Keywords: Tanzania, Coffee price, volatility, policy changes, GARCH model