TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

International Soft Wheat Markets Under Policy Intervention
Summing up, on the import side the entry price is the threshold above which
there is co-movement between the EU and the world price, while on the export
side we might think that it is the intervention price that performs as such 53 . Since
the first condition is more restrictive 54 , only if the world price is above both the
intervention and the entry price we expect that it positively interact (or,
analogously, is cointegrated) with the European one, because of the annulment of
both export restitutions and import variable levies. Nevertheless, in this case we
would end testing for the presence of co-movement between the EU price and the
entry one, since, in practice, the world price was above the entry price only for a
very short number of months 55 . In practice, the entry and the intervention price are
very correlated, and proportional after 1995 because of the “155% rule”. Testing
for cointegration between the European and the entry price would then be equal,
but for a constant term, to testing for cointegration between the European and the
intervention price.
We might instead verify whether the EU price positively interact with the
world one also when the latter is below the entry price but above the intervention
one, a situation which occurred especially from the MacSharry reform onwards.
The intervention price (which can be seen as the very basic instrument of EU
agricultural market policy in the past 56 ) is a threshold under which the world price
has no influence on the intervention price.
In this way, we are implicitly identifying two regimes: if the world price is
below the intervention one, then the intervention mechanism is in place, and we
expect the EU price to follow the behaviour of the intervention one. If, in turn, the
world price is above the intervention price, we might think that the EU price is
free to follow the behaviour of the world one, provided export taxes will not
eventually prevent him from rising too much.
In chapter 5, within this simple theoretical framework, different analytical
models will be developed. They still are cointegration models aimed at testing for
price co-movement (basically, the LOP validity), but at the same time provide
alternative schemes for the analysis of price transmission in international markets
accounting for policy regime changes.
53 Actually, if both “thresholds” are binding (the word price is below them), the price transmission elasticity
of the world to the EU price is zero; but the one from the intervention price to the world one is negative. In
fact, the entry price and the export restitutions prevent the world price from affecting the EU price, but if the
intervention (and then, the entry) price goes up, it will lower the world price through an increased export
supply (Thompson 2000, p.720). We won’t consider this case in this analysis, since our objective it to verify
whether, under certain conditions, there is co-movement between the EU and the world price, or in other
words, a positive price transmission elasticity exists.
54 The entry price is by definition higher than the intervention price.
55 In this analysis, 14 months over 25 years.
56 In fact, it is basically from the intervention price that other domestic and commercial policy measures
(export restitutions, entry prices and then import variable levies) are established.
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