TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

International Soft Wheat Markets Under Policy Intervention
Under certain conditions, this should hinder the world prices from influencing the
domestic ones.
In international trade policy, in 1995, the URAA of the WTO aimed at
achieved an increased market liberalization; consequently, with an effective
“tariffication”, international price transmission elasticities should have increased.
However, also in this respect, the so-called “155% rule” might well have reduced
its effects on soft wheat markets.
In this chapter, all these policy changes have been described in detail, to assess
their effects on price transmission in order to develop a consistent theoretical
framework. This has the objective of understanding under which conditions the
EU and the world prices are expected to interact, provided the presence of the EU
domestic and border policies and of the implementation of the URAA of the
WTO.
A thorough examination of the various combinations of domestic and
international market conditions, considering the various policy measures, suggests
that the EU and the US price are expected to be positively correlated only if the
latter is above both the entry and the intervention price.
However, this has never been the case. What is argued is then that it is the
intervention price which acts as a threshold under which the world price doesn’t
affect the European one. The European price is expected to interact with the world
one only when the latter is above the intervention price; otherwise, it will follow
the intervention price.
The relative position of the US and intervention prices allows the identification
of different policy regimes, in which the price transmission relations are different
depending on the effectiveness of policy intervention, represented through the
position of the intervention price.
This theoretical framework represents a development of the one presented in
chapter 2 that explicitly addresses the need for taking policy regimes into account
while investigating price transmission, and will be used for the development of
different empirical models in the next chapters.
The descriptive analysis of the dataset concludes the chapter. Some key facts
that emerge are the higher volatility of the world price, if compared to the
European one; and the fact EU prices show a constant decrease over time, while
the world ones increase again after 1993.
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