TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

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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
Empirical Analysis: Cointegration Models Accounting for Policy Regime Changes these works attempts to take policy regimes into account are limited to the inclusion of dummy variables, or the sub-division of the sample. The chapter is structured as follows. In paragraph 5.2, the empirical models are presented. They are classified in two groups: in paragraph 5.2.1, a composite variable is introduced; in paragraph 5.2.2, three different ad hoc “threshold” cointegration models are presented, in which adjustment coefficients and cointegration parameters are assumed to vary depending on the policy regime in place. Paragraph 5.3 concludes. 5.2 The empirical models developed The objective of this paragraph is to find out innovative ways of considering policy regimes while testing for price transmission and, once this has been made, to determine whether a long-run relationship exists between the French soft wheat price (swfr) and the US cif price (hrw). In this paragraph, different cointegration models are developed. Indeed, cointegration models allow to explore both short and lung run dynamics. They all stem from the theoretical framework presented in paragraph 4.3: the basic idea is that the intervention price acts as a threshold above which the EU and the US price can interact. Different ways of modeling such a relation can be figured out. At first, a composite variable, equal to the maximum between the intervention and the US price, is introduced in a cointegration model and its relation with the EU price is studied. This is a straightforward representation of the simple assumption that “the EU price is expected to follow the maximum between the intervention and the US price”. The creation of this composite variable is a very simple way of modeling the policy regime switches: indeed, also in some econometric models, even if by means of Ordinary Least Squares (OLS) estimates, the relevant European price is assumed to depend on either the US or the intervention price depending on which of them is higher. In a second step, other models are estimated. This time, through the appropriate use of dummy variables, either the adjustment coefficients or the parameters of the cointegrating vector, or both, are allowed to vary according to the policy regime in place. In other words, these parameters are allowed to take different values if the US or the intervention price is the significant reference price for the EU. Firstly, a particular cointegration model is estimated, with different adjustments coefficients depending on the observable policy regimes in place; the LOP is imposed between the French price and the highest between the US and the intervention price. Secondly, the price transmission elasticity is allowed to change according to which price the French one is related to (always, the highest between 76
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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
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Price Transmission and the Law of O
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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 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
Page 116 and 117: REFERENCES Alderman, H., 1992. Inte
Page 118 and 119: References agricultural policies: s
Page 120 and 121: References Isard, P., 1977. How far
Page 122: References Thompson, S. R., Sul, D.
Page 125 and 126: 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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