TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Analysis: Cointegration Models Accounting for Policy Regime Changes
the intervention and the US price). Finally, both adjustment coefficients and the
cointegrating vector parameters are assumed to vary.
The cointegration models presented, though over-simplified, represent an
attempt of combining policy and price data. To the author’s knowledge, so far no
such attempts have been made.
The “composite variable” model, Model 1, is presented in paragraph 5.2.1;
whereas the other empirical models, Model 2, Model 3 and Model 4, are presented
in paragraph 5.2.2.
5.2.1 Model 1: the use of a composite variable
As anticipated, to take into account the role played by EU policies for soft
wheat, some alternative schemes can be proposed.
The first one is the creation of a composite variable, the “EU external reference
price” (wreft). Indeed, assuming that the fundamental target of the EU price policy
is to keep at least the intervention price level in the internal market, each month
the “EU external reference price” is calculated as the maximum between the
intervention price and the US (world) price; wreft = max (hrwt,pintt).
What is argued is that the EU price follows the US price, when it is above the
intervention price, and vice versa. The intervention price acts as an implicit
downward threshold for the US price.
In this paragraph, the empirical study will be carried out both on the whole
sample (301 observations, 1978:12 to 2003:12), and on two sub-samples,
determined on the basis of the policy considerations made in the previous chapter,
as described in table 5.1 63 .
Table 5.1 The two sub-samples used in the cointegration analysis
1978:12- 1993:06 175 observations
1993:07- 2003:12 126 observations
Precedent to substantial CAP reform
(Regular CMO functioning, first reforms of 1988)
Following substantial CAP reform
(Mac Sharry reform, Agenda 2000, Fischler reform)
Indeed, the MacSharry reform of 1993 represents the first fundamental change
in the CAP of the EU, since, for the first time, substantial cuts of the intervention
prices (-30%) were implemented. In fact, as expected, the US price tends to be
63 Considering the limited power of unit roots and cointegration tests, it was not deemed appropriate to split
the whole sample into the four sub-samples described in paragraph 4.2.2. For this reason, and considering its
political relevance, the MacSharry reform has been chosen as the fundamental break.
77