TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

α
LM test
ARCH(13)
Empirical Analysis: Cointegration Models Accounting for Policy Regime Changes
Table 5.2 Model 1 estimates for swfr and wref, 1978:12-2003:12
∆swfr ∆wref Cointegration vector
-0.093***
(0.030)
0.207
(p-value 0.999)
2.371
(p-value 0.999)
0.064**
(0.030)
0.201
(p-value 0.999)
3.402
(p-value 0.996)
swfr = − 0 . 397+
1.
054*
* * wref
t
( 0.
670)
( 0.
131)
cost = 0 χ 2 = 0.333 (p-value 0.564)
β wref = 1 χ 2 = 0.161 (p-value 0.688)
β wref = 0 χ 2 = 18.886 (p-value 0)
Standard errors are reported in parenthesis
LM test: Lagrange Multiplier test with the null hypothesis of no-autocorrelation
*significant at 10%; **significant at 5%; *** significant at 1% for the null hypothesis of zero coefficients (#, ##
and ### respectively if for βwref the null hypothesis of equal to one is rejected)
The cointegration relation is swfrt = -0.397 + 1.054 wreft. The imposition of a 1
price transmission elasticity coefficient is not rejected (χ 2 = 0.161; p-value 0.688).
The constant term is not significantly different from zero (χ 2 = 0.333; p-value
0.564). Adjustment coefficients have the expected sign and are both significant.
The residuals from the cointegration relationship show a stationary behaviour
(figure 5.2). We can see that three major deviations from the long run relation,
corresponding to major peaks of the error correction term, occurred in 1985, 1996
and 2002; in these months the French price was low, as explained before, because
of the use of export taxes or of the specific situation of 2001/2002, when large
inflows of products depressed domestic EU prices. Since these are accounted for
in the short-run dynamics of the system but not inside the cointegration vector 69 ,
what we observe is an increase in the disequilibrium term. To this point, the
empirical findings confirm our expectations: the French price is linked to a series
constituted by the maximum between the intervention and the US price, and the
price transmission elasticity is very close to one.
To explore more in depth how this relation has possibly changed in time, the
analysis has first been repeated in the sub sample 1978:12-1993:06. Here, wref is
almost always constituted by the intervention price, which is higher than the US
price 145 months over a total of 175 (83% of the total number of observations).
Indeed, up to the MacSharry reform intervention price were normally set above
the world price.
swfr is cointegrated with hrw, but the price transmission elasticity coefficient in
the cointegration vector is very low (see table 5.3, Model 1a, where “a” indicates
that estimates refer to the first sub-sample) 70 .
69 This could be done by cointegration techniques accounting for structural breaks (see chapter 6).
70 The VECM was estimated with 5 lags (optimal number according to the AIC when monthly dummies were
included) and with the monthly dummies for June, July, and August only, which allowed getting better
t
81