TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

= β
2 i0
Empirical Tests for Spatial Price Analysis
(3.19)
b α + β + β −1
(3.20)
3 = i i0
i1
An Index of Market Connectiveness (IMC) is thus obtained, being
IMC i
( 1+
b1
)
=
( b − b )
3
1
(3.21)
Since long run equilibrium conditions bring ( P 1t − P1
t−1)
= 0, the numerator and
the denominator are, respectively, the contributions of local and central market
price history to current prices. If markets are integrated, the IMC index should be
close to zero, since the lagged effects of regional market shocks are small relative
to the central reference market ones.
Fackler and Goodwin (2001, p.1003) also in this case provide an interpretation
of the model based on the structural VAR model they elaborate. They find out that
a large value of the IMC may indicate that the locations are not integrated but may
also indicate that they are integrated and that transport rates exhibit a high degree
of persistence; a low IMC suggests instead that markets are not isolated but is
unclear how connected they are. They conclude that both Ravallion’s strong form
criterion and Timmer’s IMC index are helpful only if one has the confirmation
that transport costs are white noise processes.
3.2.2.3 Impulse response analysis
In the moving average representation of a VAR system, Impulse Response
Functions (IRFs) represent the effects of exogenous shocks to the variables, and
allow to study their path of response. For a system of n prices, the set of impulse
responses is given by
∞
Pt = ∑ M ket
−k
k = 0
(3.22)
The most important aspect of the analysis of IRFs is the possibility of checking
whether the price series converge quickly after an isolate, exogenous shock to one
of them (Goodwin and Piggot 2001, p.315). If two markets are integrated, an
exogenous shock to prices in one market should indeed evoke an equilibrating
response in the other one (Goodwin et al. 1999, p. 168). IRFs provide a more
general view of market integration than the standard “all or nothing” tests, since
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