Agricultural market liberalization and instability of domestic agricultural markets: The case of the CAP

It is our purpose to illustrate the effects of agricultural market liberalization on the instability of domestic agricultural markets and to show the consequences for producer welfare. The analysis concentrates on the grain market. First, we illustrate theoretically how the central liberalization steps of the European grain market policy in the 1990s have influenced the stability of prices on the domestic agricultural markets. An important aspect of this illustration is the way decisions on tariffication have been realized on the European grain market. Next, within an econometric framework we test empirically whether the price transmission pattern between international and domestic agricultural markets has changed as a consequence of the liberalization decisions and, if so, by how much. Finally, we explore relationships among the liberalization decisions, domestic grain market instability, and producer welfare.