TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Analysis: Cointegration Models Accounting for Policy Regime Changes
Model 1a was then estimated for swfr e wref, that are once again cointegrated:
estimates are reported in table 5.4 71 .
α
LM test
ARCH(13)
Table 5.4 Model 1a estimates for swfr and wref , 1978:12-1993:06
∆swfr ∆wref Cointegration vector
-0.211***
(0.074)
0.430
(p-value 0.978)
34.030
(p-value 0.001)
0.210***
(0.052)
0.293
(p-value 0.998)
25.881
(p-value 0.018)
swfr = 0.
679+
0.
848*
* * wref
t
( 0.
643)
( 0.
124)
cost = 0 χ2 = 0.758 (p-value 0.384)
βwref = 1 χ2 = 0.990 (p-value 0.320)
βwref = 0 χ2 = 18.738 (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 long run relationship is swfrt = 0.679 + 0.848 wreft. Like in the overall
sample, both adjustment coefficients have the expected sign and are significant,
though here they are higher in magnitude. Restrictions imposing both a perfect
price transmission and a zero-constant are not rejected (respectively, χ 2 = 0.990;
p-value 0.320; χ 2 = 0.758; p-value 0.384).
In the first sub-sample, the relation between the French price and the
combination between the US and the intervention price presents a stronger
adherence to the LOP than when the US price enters the equation as such. This is
somehow expected, provided the predominance of the intervention price in the
wref series.
Finally, the analysis was repeated in the sub-sample 1993:07-2003:12 (Model
1b). Differently from the observations preceding the MacSharry reform, as
expected wref is this time constituted almost exclusively by the US price, which is
below the intervention price only 17 months over 126 (13% of the total number of
observations). This basically happens because the MacSharry reform implemented
a substantial reduction of the intervention prices.
For the French and the US price, there is evidence of cointegration among the
series 72 . The Model 1b estimates are reported in table 5.5.
71 The optimal number of lags selected by the AIC was 13 lags; 1 if monthly dummies were considered. One
lag only did not allow to remove autocorrelation; the VECM was then estimated with 13 lags.
72 The cointegration rank was 1 when 23 lags and seasonal dummies were considered. Since 23 lags seems
however an overestimated number, the cointegration rank was checked also with 13 lags. In this case, the
series are cointegrated if the null hypothesis is rejected at 10% significance, always with the inclusion of all
the monthly dummies; the latter estimates are reported. See annex C.
t
83