TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Analysis: Cointegration Models, Structural Breaks and Policy Reform
It can be noticed that the long run transmission elasticity (0.160) and its
increase after the URAA implementation (0.396) show values which are
consistent with those presented in table 6.4.
6.5 Concluding remarks
This chapter provides a further examination of short and long-run comovement
relations between US and internal EU prices for soft wheat by
considering policy regime changes.
The major EU and international market policy changes have here been taken
into account by using cointegration techniques allowing for structural breaks in
the deterministic trend of the cointegrating vector. The model proposed by
Johansen, Mosconi and Nielsen (2000) has been modified by considering more
than one structural breaks.
Also in light of the analysis carried out in the previous chapter, it is confirmed
that, in the years 1978-2003, the US and the EU price common path emerges only
when structural breaks, i.e. policy regime changes, are appropriately considered.
Indeed, the empirical analysis shows that both prices respond to deviations
from the long run relation, which has been affected by policy regime changes:
namely, the MacSharry and Agenda 2000 reform of the CAP, and the URAA
implementation. The introduction of an additional dummy accounting for the
peculiar tariff situation of the 2001/02 campaign allows to find a better model
specification.
As expected, the MacSharry reform and Agenda 2000 are responsible for the
reduction of domestic EU prices, while the URAA causes an increase in the price
transmission elasticity (from about 0.20 before the implementation of the URAA
to about 0.40 afterwards; and this in addition to a further reduction of prices).
Even if, remarkably, evidence of co-movement between the two prices is
confirmed, still full price transmission is not in place.
Concerning the adjustment coefficients, interestingly, we note that the French
ones are always significant and within the range that emerged in the previous
chapter (see paragraph 5.3). Namely, they are close to the values shown when
both the intervention and the US prices appear in the cointegration vector. This
can be seen as a confirmation that the technique presented here is a consistent
alternative to the ones presented in the previous chapter: the introduction of
structural breaks in the deterministic term of the cointegration vector elicits the
same response from the French price than when policy regime changes are
represented by introducing the intervention price in the models.
Also the response of the US price is consistent: in fact, its adjustment
coefficients are always positive and bounded between 0.012 and 0.142. In this
respect, it would seem that the model presented in this chapter really solves some
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