TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

5 EMPIRICAL ANALYSIS: COINTEGRATION
MODELS ACCOUNTING FOR POLICY
REGIME CHANGES
5.1 Introduction
The aim of this chapter is to introduce policy regimes in the analysis of
international price transmission mechanisms.
The focus is on the soft wheat market between the EU and the US, in the years
1978-2003. As explained in the previous chapter, the French price is assumed to
be representative of the EU price, whereas the US one of the world price.
Different econometric models will be derived on the basis of the considerations
made in paragraph 4.3, where a theoretical framework has been developed with
the objective of including policy regimes in the analysis, by combining policy and
price data.
It has been demonstrated that the EU domestic price is expected to follow the
world one only if it is above the intervention price; otherwise, it is expected to
follow the latter one. This claim will here be explored in different ways.
The objective of the analysis is twofold: on the one side, suggesting different
econometrical models accounting for policy regime changes, based on the
theoretical framework elaborated. To the author’s knowledge, to date not such
attempts have been made.
On the other, shedding light on a controversial empirical evidence, the analysis
aims at verifying if there is co-movement between the EU and the world prices,
and how policy changes are likely to have affected this relation.
In fact, in the existing literature either the EU and US prices are found not to
interact (Verga and Zuppiroli 2003), or their price transmission elasticity to be
positive, although rather small (Thompson and Bohl 1999; Thompson et al.
2002a; 2002b), and in this case either influenced (Thompson et al. 2002a) or not
by international policy regime changes (Thompson et al. 2002b). However, in