TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Tests for Spatial Price Analysis
between different markets, analyzing the existence of co-movement between
prices in different locations.
However, despite an abundant literature, empirical evidence is nonetheless
mixed. While, on the one side (see paragraph 2.3), the hypothesis needed for the
Law of One Price to hold are quite restrictive and unlikely to hold in practice,
since many factors can prevent prices from convergence, on the other, when
empirical tests rely on prices only, as it is often the case, it is just not possible to
test separately the efficiency hypothesis and the strong assumptions underpinning
the model specifications (Barrett 2001, p.29).
Moreover, for many agricultural commodities, policy intervention strongly
affects international price transmission.
This aspect has not been adequately assessed in most empirical applications;
the introduction of policy variables and policy regimes has often been considered
only marginally. Empirical simulation models, in turn, explicitly consider policy
factors, but they often rely on simplistic assumptions, like the exogeneity of one
of the prices.
To bridge this gap, appropriate techniques should be used to remove these
simplistic hypothesis, while, at the same time, including policy regimes in the
model.
In the remainder of this work, by using cointegration techniques (which allow
to remove the exogeneity hypothesis and to separate short and long run
dynamics), an explicit attempt will then be made at introducing policy regimes by
developing a consistent theoretical framework. Accordingly, different empirical
models will be derived.
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