TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Tests for Spatial Price Analysis
inherently incapable of determining if it is because of inefficiency in an integrated
market or lack of perfect integration (Fackler and Goodwin 2001, p.1008;
p.1016).
Conforti (2004, p.3) notices that the prevailing approach in many papers is
non-structural, and just aims at testing the consistency of the empirical evidence
with the competitive framework, without proposing an explicit behavioural
model; many econometric applications have analyzed mostly the dynamics of
price transmission, while elaborating less from a theoretical point of view. A
structural approach is on the other side more frequent in the analysis of vertical
price transmission.
A final consideration concerns issues related to how policy intervention is dealt
with. Indeed, for agricultural commodities, border and domestic policies are in
many cases expected to play a strong role. But, even if price transmission in
agricultural commodities markets is an issue which has received considerable
attention (Fackler and Goodwin 2001), despite the use of increasingly
sophisticated econometric techniques appropriate concern for policy factors is still
missing.
Some modelling approaches, on the other side, while making explicit use of
policy variables in price transmission equations, still rely on some simplistic
assumptions, like the “small country hypothesis” for the EU in the AGMEMOD
model: the EU is assumed not to have an influence on world prices, which enter
the model exogenously (AGMEMOD Partnership 2007a; 2007b).
Appropriate concern for policy factors seems to be of crucial importance for
some agricultural commodities, as will be clear in chapter 4. The objective of this
work is to develop a consistent theoretical framework explicitly considering
policy variables and policy regimes (chapter 4), while empirical applications will
be provided in chapters 5 and 6.
3.5 Concluding remarks
To test for price co-movement, a variety of empirical methods have been used
as soon as new econometric techniques were developed: simple regression and
correlation analysis, dynamic regression models, switching regime models and
rational expectation models. In particular, amongst the dynamic models,
cointegration techniques soon had an intuitive appeal for the study of price
transmission, as they allow to disentangle short and long run dynamics. These
models have been extensively used and developed towards several directions
(such as the introduction of thresholds, the possibility of asymmetric adjustment,
the introduction of structural breaks).
For agricultural commodities, price transmission mechanisms have been
extensively studied: most works basically aim at verifying whether the LOP holds
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