TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Analysis: Cointegration Models, Structural Breaks and Policy Reform
of the interpretative problems which came out in the previous one (paragraph
5.2.2.1 and 5.3). Consistently with chapter 5, the US price behaves as weakly
exogenous.
To sum up, our findings confirm and contribute to shed light on a complex and
controversial empirical literature, bridging the gap between studies not finding
any evidence of co-movement and those that, conversely, find evidence of
increased price transmission elasticities following the URAA.
What we find is that co-movement between the two series exists, albeit the
price transmission elasticity is small, and has been influenced by domestic and
liberalizing policy reforms.
The analysis show that the implementation of the URAA almost doubled the
elasticity of transmission between European and US prices. This means that the
markets could benefit from an increased efficiency.
This exercise provides an alternative way of analyzing US and EU price
patterns in the past 30 years by explicitly considering different policy regimes.
In order to verify the effects of the major changes of domestic and border
policies on price transmission, the use of time series allowing to go back in time
was preferred (Eurostat data). As noted already, this in turn implied that,
unfortunately, more recent phenomena could not be investigated.
In the latest months, in particular, commodity world markets have been
characterized by soaring prices whose causes have both a transitory and a
structural nature. This provoked remarkable changes in the commercial policy
measures in place in a number of countries, and in the EU. In our analysis this
implies that, presumably, other structural breaks could be introduced in the
cointegration vector, although their timing might not be so clear cut. In the EU,
for example, the elimination of import duties, which was already included in the
previous regulations to be applied in case of high world prices, keeps a transitory
nature.
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