TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Analysis: Cointegration Models, Structural Breaks and Policy Reform
In the first VECM estimates, based on policy considerations (see paragraph
4.2.2), three basic structural breaks are imposed:
the implementation of the MacSharry reform in 1993:07, which we expect had
the effect of lowering the French price, due to the reduction of intervention
prices (dummy variable reg1t = 1 if t ≥ 1993:07, and 0 otherwise);
the implementation of the URAA in 1995:07, which, if tariffication was
effectively in place, should have increased price transmission elasticities. For
this reason, both the dummy reg2t = 1 if t ≥ 1995:07, and 0 otherwise, and the
interaction term reg2hrwt = hrwt * reg2t are introduced in the cointegration
vector;
Agenda 2000 reform, that also set the lowering of intervention prices (reg3t =
1 if t ≥ 2000:07, and 0 otherwise).
By inserting these regime dummies and the interaction term, the cointegration
vector becomes (assuming it is normalized with respect to the French price):
[ swfr β hrw β reg β reg2
β reg2hrw
β reg3
]
t
0
1
t
2
1t 3 t 4
t 5
β (6.2)
Based on the effects that the various policy regime changes are likely to have
had, we can make some assumptions concerning the expected sign of the
parameters; we expect:
β0 < 0, i.e., a positive constant term in the cointegration relationship;
β1 < 0 and, presumably, -1 ≤ β1 < 0, i.e., overall, a positive price transmission
elasticity between the US and the EU price, which might be at the most equal
to 1 (perfect price transmission);
β2 , β5 > 0, since both the implementation of the MacSharry reform and of
Agenda 2000 are expected to have lowered the French price;
β4 < 0 (and, possibly, │β4 + β1│≤ 1), since we expect the URAA to have
increased the value of the price transmission elasticity, at maximum up to the
value of 1 (perfect price transmission) after the URAA.
Estimates are reported in table 6.4.
In the cointegration vector β1 = -0.250 and β4 = -0.314; this means that, after
the URAA implementation, the price transmission elasticity between the two
prices has increased up to the value of 0.564. As expected, β2, β3, β5 > 0; this
means that the constant of the cointegration relation between the French and the
US price decreased (most likely, as the French price decreased following the
implementation of the MacSharry and of Agenda 2000 reforms), from 3.835 to
3.671 (i.e., 3.835-0.164) after the Mac Sharry reform, to 2.009 (3.835-0.164-
1.662) after the URAA implementation, and to 1.918 (3.835-0.164-1.662-0.091)
after Agenda 2000.
t
101