TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

7 CONCLUDING REMARKS
This work aims at providing a theoretical framework to consider policy
regimes while testing for price transmission, and at developing different models
for the empirical analysis.
The case study is constituted by international soft wheat markets in the years
1978-2003. The French and the US prices are assumed to represent, respectively,
the EU and the world ones.
This work tries to shed light on a mixed empirical evidence. Indeed, the Law of
One Price is often found not to hold in practice. Many factors are supposed to
prevent prices from convergence: amongst them, policy measures are expected to
play a relevant role.
This is true in particular for the agricultural sector, traditionally characterized
by high levels of policy intervention. The recent rise in food prices on
international commodity markets drew new attention on price transmission
mechanisms and, specifically, on the effects of policy intervention.
Theoretical considerations on the functioning of domestic and border policies
on international wheat markets (paragraph 4.3) lead to the basic assumption that
the domestic EU price and the world one are expected to interact only when the
latter is above the EU intervention price. The relative position of this policy
variable and of the US price allows to define different policy regimes;
alternatively, the intervention price can be considered as a threshold for the US
price to interact with the European one.
Accordingly to these theoretical considerations, different empirical models are
derived.
At first (chapter 5) the intervention price is used in different ways. Either a
composite variable is built, constituted by the maximum between the intervention
and the US price, or the LOP is imposed to hold between the French price and
either the US or the intervention price depending on the policy regime in place,
i.e. on which of the two prices is higher. In this case, either the adjustment
coefficients, or the long run transmission elasticities, or, finally, both, are allowed
to change.