TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Analysis: Cointegration Models Accounting for Policy Regime Changes
While on logarithms the null hypothesis of unit roots cannot be rejected, for
log-differences it is possible to do so. This is generally true for all the series
considered, both in the whole sample and in the two sub-samples identified as
before and after the MacSharry reform. Results then overall confirm that the
processes are I(1) (i.e., integrated of order 1, or difference-stationary), as it is the
case in all the literature revised, despite the fact that they are nominal prices
(Fanelli and Bacchiocchi 2005), and are reported in annex B.
Provided that the prices are first-difference stationary, a cointegration analysis
has been performed. The series have been analyzed in pairs. The optimum laglength
for the VAR has been chosen according to the minimization of the Akaike
Information Criterion (AIC) up to a maximum of 18 lags 66 . The Johansen and
Juselius procedure has been used to estimate the rank of the cointegrating matrix
(where not indicated differently, the null hypothesis has been rejected at 5%
significance level) and the VECM in the “restricted constant case 67 .
Autocorrelation was tested with a Lagrange Multiplier test with the null
hypothesis of no autocorrelation up to the 18 th lag (the null hypothesis has been
rejected at 5% significance level). Dummy variables have been introduced outside
the cointegrating vector to take account of the months in which export taxes have
been imposed by the EU with the objective of preventing prices from raising too
much, and also of the Russian and Ukrainian grain inflow of 2001/2002.
First of all, in the whole sample, the rank of the cointegrating matrix was
estimated between swfr and hrw, to see whether the LOP holds between the EU
and the US prices. As expected from visual inspection of the two time series and
from policy considerations, the rank of the cointegration matrix is zero
(Johansen’s tests are reported in annex C). However, by carrying out unit root
tests on the French-US price spread in the overall sample and in different subsamples,
some evidence of stationarity emerges, which seems to be stronger after
1992 (see annex D).
Although these results are partly contrasting, we could conclude that the each
of the two prices follows its own pattern and that the influence of the market
policies is so strong that they are not related to each other. In other words, if
policy variables and policy regimes are simply ignored in the analysis, and if such
a long period of time is considered, the two prices wander following each its own
path.
66
The number of lags selected by the SBIC did not normally allow to remove autocorrelation in the
equations.
67
Visual inspection of the data shows that there is no trend in the series (figure 4.8), and both theory and
visual inspection of the data imply the presence of a constant in the long-run relationship, accounting for all
elements contributing to price differentials not explicitly modelled in the price transmission equation. This
means that, even if there are no linear time trends in the level of the data, the cointegrating relation has a
constant mean.
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