Optimal Price Stabilization Policies for Staple Grains: The Case of Maize in Eastern and Sothern Africa

In the context of (a) stability in domestic maize production, (b) a significant divergence between import and export parity prices for maize, and (c) random variability in world maize prices, Eastern and Southern African governments have for many years attempted to reduce the instability in domestic maize prices. However, governments face a trade-off between the fiscal costs of price stabilization and the degree of price variability allowed. This paper presents a dynamic stochastic simulation model that not only explores the nature of this trade-off, but also determines optimal government policies for domestic target prices and domestic target levels of stock in order to minimize the expected fiscal costs of maintaining given degrees of price stability