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Abstract

A key parameter determining the welfare impact from a world market shock is the price transmission elasticity. This paper proposes a model which explains a country's domestic price response to world market shocks in terms of its demand structure. The model delivers two testable predictions; price transmission is increasing in per capita food expenditure and in income inequality. In the empirical analysis of domestic price changes during the food crises I find significant inverse U-shaped relationships between domestic food price growth and per capita food expenditure. Unequal countries also experienced higher price growth but the relationship is less significant.

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