TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

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International Soft Wheat Markets Under Policy Intervention completed by the elaboration of various empirical models, all with specific reference to cointegration models (which have been dealt with in paragraph 3.3), that will be used in the analysis which will follow in chapters 5 and 6. Following the existing literature (for example, Thompson and Bohl 1999, Thompson et al. 2000, Thompson et al. 2002a and 2002b, Verga and Zuppiroli 2003), we will assume that the LOP hypothesis do apply on international soft wheat markets, and on this basis we will try and focus on the effects of policy intervention. In a certain way, our main hypothesis is then that the LOP holds but for policy intervention. As explained in the previous paragraphs, analyzing how policy regimes affect international price transmission is a crucial issue. This analysis assumes particular relevance in light of the ongoing policy debate concerning the viability and the effectiveness of intervention policies on agricultural commodity markets. The fundamental problem to tackle is the following one. Despite the fact that EU domestic and border policies aimed at insulating domestic markets from the world ones have, in practice, always been in place, we nonetheless aim at building a sensible framework to test for co-movement between EU domestic prices and the world ones. Indeed, because of trade barriers (namely, import variable levies and export restitutions), we expect domestic EU prices to be isolated from the world ones 50 ; while, in turn, we suppose that EU export (i.e., freight on board, fob) prices are cointegrated with the world ones right because of the use of export restitutions (Barassi and Ghoshray 2007; Ghoshray 2002; Ghoshray et al. 2000). In fact, export subsidies are set with the objective of making EU exports competitive on world markets, bridging the gap between the internal (high) price and the world one. Basically, different price transmission mechanisms will be in place according to the various combinations of the domestic and border policies described in the previous paragraph. A simple scheme is reported in table 4.2. Intuitively, since in the period covered by the analysis the EU is a net exporter 51 (figures 4.5 ad 4.6) we expect that what occurs on the export side is more relevant to the analysis. We could think that the EU price will interact with the world one only if it is high enough to make export restitutions go to zero; i.e., at least higher than the intervention price. 50 Van Meijil and van Tongeren (2002, p. 457) model the European market price as a weighted average of the entry and the intervention price, depending on the entity of net exports. The more the net exports, the closer the market price to the intervention one, and the other way round. 51 This is true also for France, whose price will be assumed to be the representative price for the EU. Its selfsufficiency rate for soft wheat, between 1978 and 2000, was on average 218%, with a minimum of 168% and a maximum of 277% (Eurostat). 65
International Soft Wheat Markets Under Policy Intervention 66 Table 4.2 Summary of the relationships between domestic EU and world prices. Trade position Import side Relevant price for EU price formation Pre - URAA world price < entry price entry price world price > entry price world price Post - URAA world price plus tariff < 155% intervention price Export side world price < intervention price (export restitutions are paid) (almost never the case) world price plus tariff world price plus tariff > 155% intervention price 155% intervention price world price > 155% intervention price world price intervention price world price > intervention price world price Going back to table 4.2, on the import side, the domestic EU price will follow the world one only if the world price is high enough to make the variable levy go to zero, deactivating the border protection mechanism; otherwise, it will follow the entry price. After 1995, the functioning of the mechanisms is slightly more complicated, but analogous. If the world price plus tariff is below the 155% of the intervention price, then “pure tariffication” would apply, and the EU price would follow the world price plus tariff: but this was actually never the case (Gallezot 2007, p.16). Instead, what normally happens is that the world price plus tariff exceeds 155% of the intervention price; according to the “155% rule”, the 155% of the intervention price acts as an entry price, and a variable levy covering the difference between the world price and the 155% of the intervention price is in place. We expect the EU price to be related to such an entry price. Should the world price be higher than 155% of the intervention price, then we would expect the variable levy to go to zero and the EU price to follow the world one. On the export side, thanks to export subsidies 52 , we can assume that the domestic EU price follows the highest between the intervention and the world price. The intervention price operates as a threshold below which the world price becomes inactive. If the world price is below the intervention price, indeed, export restitutions will prevent the EU price from falling; only if the world price is above the intervention price export restitutions will go to zero, and the EU price can be assumed to interact with the world market one. 52 For the sake of simplicity, as they were never binding for the EU, we don’t consider WTO limits on export subsidies.
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TESTING INTERNATIONAL PRICE TRANSMI
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Associazione “Alessandro Bartola
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Index 1 INTRODUCTION ..............
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1 INTRODUCTION The notion of “pri
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Introduction These recent phenomena
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Introduction Whereas the Common Agr
Page 15 and 16: Price Transmission and the Law of O
Page 24 and 25: 3 EMPIRICAL TESTS FOR SPATIAL PRICE
Page 26 and 27: Empirical Tests for Spatial Price A
Page 32 and 33: = β 2 i0 Empirical Tests for Spati
Page 48 and 49: ∆p + t ∑ ⎡β⎤ ' ⎡ p t =
Page 54 and 55: 4 INTERNATIONAL SOFT WHEAT MARKETS
Page 56 and 57: International Soft Wheat Markets Un
Page 58 and 59: 30.000 20.000 10.000 0 1961 1963 19
Page 70 and 71: 250 200 150 100 50 1978:12 Internat
Page 76 and 77: 5 EMPIRICAL ANALYSIS: COINTEGRATION
Page 78 and 79: Empirical Analysis: Cointegration M
Page 82 and 83: α LM test ARCH(13) Empirical Analy
Page 96 and 97: 6 EMPIRICAL ANALYSIS: COINTEGRATION
Page 110: Empirical Analysis: Cointegration M
Page 113 and 114: Concluding Remarks These models rep
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REFERENCES Alderman, H., 1992. Inte
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References agricultural policies: s
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References Isard, P., 1977. How far
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References Thompson, S. R., Sul, D.
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Annexes 124 Annex A - Empirical ana
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Annexes METHODOLOGY DATA USED MAJOR
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Annexes Variable swfr 138 Annex B -
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Annexes Variable swfr 140 Table B.3
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Annexes 142 Table B.7 - Unit root t
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Annexes 144 Table C.5 - Cointegrati
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Annexes 146 Table D.4 - Unit root t
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Annexes 148 Annex E - Unit root tes
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Annexes Table E.5 - Unit root tests
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The notion of “price transmission
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