TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Analysis: Cointegration Models Accounting for Policy Regime Changes
weakly exogenous. Once again, restrictions imposing both a perfect price
transmission and a zero-constant are not rejected (respectively, χ 2 = 0.0006, pvalue
0.981; χ 2 = 0.001; p-value 0.970).
Differently from what happens for the first sub-sample, this time the two
relations estimated are much closer; the explanation lies of course in the
predominance of the US price series in the composition of wref.
In the second subsample, nonetheless, the evidence of cointegration for swfr
and wref is weaker than in the first and in the overall ones (the null hypothesis of
a zero cointegration rank is in many cases rejected only at 10% significance; see
annex C). This might be due to the fact that what happened in 2002 (when the
Ukrainian or Russian price, which was much lower than the US price, was
probably the true “world price” for the EU), is not explicitly considered inside the
cointegration vector. This would get more importance as the number of
observations is reduced, which is what happens when moving from all the
observations to the second sub-sample.
Summing up, the composite variable used allows to consider in the
cointegration model the presence of different policy regimes. When theoretical
considerations are translated into empirical models, in general, the long run
relation between swfr and wref is very close to the LOP both when all
observations are considered, and in the two subsamples. This means that, basically
after the MacSharry reform, the US price was above the intervention price and
could interact with the EU price despite the same border policies scheme kept
being in place. It was the reduction of the intervention price, and not the (non-)
changes in the system of policy barriers 74 , which increased price interdependency.
Nevertheless, this very simple model presents a number of shortcomings. If it
has to be used for projections, unless the intervention price is considered as an
exogenous, pre-determined and known threshold also for future months, we
cannot actually identify what the wref series actually is constituted by, if the US
or the intervention price. Moreover, whether the relation found is instead a linkage
between the French and the intervention price, introduced as a threshold below
which the US price has no influence on the EU one, poses some interpretative
problems and requires further research 75 .
74 As a consequence of the lowering of intervention prices, both export subsidies and variable levies were
reduced, but the same protection system kept being in place.
75 Verga and Zuppiroli (2003), by using weekly data, find that the US Soft Red Winter wheat Rotterdam cif
price is never cointegrated with domestic European prices, and that the intervention price is cointegrated with
them in the period 1990-2002 but not in the sub-period 1995-2002. This could be explained by the instability
of the relation between intervention prices and EU internal prices. In 1995-2002, when both the intervention
price and the US price are put together in the cointegrating relation, evidence of cointegration emerges. They
suggest that EU quotations could be linked to an “average” of the two prices, but also that this is a spurious
vector not appropriate for the analysis (Verga and Zuppiroli 2003 p. 19).
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