TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

International Soft Wheat Markets Under Policy Intervention
To the author’s knowledge, to date no such attempts have been made. Policy
regimes have been accounted for in the revised literature by inserting dummy
variables in linear regressions, which allow the intercept of the price equation or
the transmission parameter to vary (Thompson et al. 2000; Thompson et al.
2002b; Vollrath and Hallahan 2006). In cointegration models, either dummies
accounting for structural breaks are put outside the cointegration vector (Hui-
Shung and Griffith 1998) or, most commonly, the analysis is repeated on the
sample split into sub-samples according to policy regime changes 57 (Barassi and
Ghoshray 2007; Thompson and Bohl 1999; see annex A for further references).
Cointegration models with structural breaks accounting for policy regime
changes, which represent another method of considering policy regimes while
testing for price transmission, (Dawson et al. 2006; Dawson and Sanjuan 2006)
will instead be dealt with in chapter 6.
4.4 The data
Wheat monthly prices for the US and France for the period 1978:12 to 2003:12
(i.e., from December 1978 to December 2003; 301 observations) are used (figure
4.8). Soft wheat French prices (swfr) are available on-line from the Eurostat
database; unfortunately, while the Eurostat database allows to go back in time, no
more recent observations were accessible. Data concerning US Gulf fob Hard Red
Winter (HRW) wheat prices and freight rates were obtained from the International
Grains Council; the freight rates used in this study are those from US Gulf to
ARAH (ARAH stands for Amsterdam/Rotterdam/Antwerp/Hamburg
destinations), which were added to the US price in order to obtain European cif
prices (hrw). The EU intervention price time series (pint) has been reconstructed
by adding to the prices established annually by the European Commission
monthly seasonal adjustments, the latter obtained from European Commission
regulations 58; 59 . Eurostat monthly bilateral exchange rates have been used to
convert in euro prices and freight rates expressed in US dollars 60 . Using prices
already converted in the same currency and not introducing the exchange rate
itself as a regressor is a widely used procedure; it follows that adjustments to the
exchange rate are considered instantaneous (see paragraph 3.4).
57
Alternatively, Thompson et al. 2002 propose to include additional observations not to reduce the power of
the tests.
58
The monthly adjustments for 1985 have been calculated as arithmetical average.
59
Eurostat price data are normally producer prices, net of transport costs to the storage centre. This is very
likely to contribute to the fact that the French price is so often below the intervention one. In the analysis, we
consider this together with the other transport costs.
60
Though the use of US dollars is more common in studying international agricultural markets, euro were
preferred because of the analysis of EU policies which will be performed.
68