TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Analysis: Cointegration Models Accounting for Policy Regime Changes
LOP holding between the French and the intervention price is positive (i.e., the
French price is above the intervention price), then the US price is expected to
raise, and the other way round.
In reality, what we observe from the estimates is that the sign of the US
adjustment coefficient is negative. This means that the US price doesn’t adjust to
the disequilibria of the LOP holding with the intervention price. This could just
indicate a non response of the US price to the disequilibria from the LOP holding
between the French and the intervention price.
But another possible, alternative explanation can be figured out. Recalling that
the LOP is holding between the French and the intervention price right because
the latter is above the US price (in other words, when the CAP market regulation
is somehow “binding”), we might think that what happens is that when the
domestic French price is above the intervention price, this is likely to depress the
world’s price through an increase in the export supply (Thompson 2000, p. 720),
and that, alternatively, when the French price is below the intervention price, the
world price would be allowed to increase.
5.2.2.2 Model 3: a changing cointegration vector
As it has been previously explained, the appeal that lead to such a widespread
use of cointegration models in price transmission testing is basically the
possibility of separating long and short run market dynamics.
In this respect, Model 3 is logically complementary to Model 2. Here, indeed,
we assume that the observable regime changes don’t affect the adjustment
parameters, i.e. the short run relations, but the cointegration vector itself.
The French price is still expected to be linked to either the intervention or the
US price according to which of them is higher; however, an attempt at discerning
to which extent the two long-run relationships are different is made. In fact, the
very nature of the relationship holding between the French and the intervention
price is likely to be different from the one with the US price. Obviously, we
suspect that the elasticity of transmission between the French and the intervention
price is higher than the one between the French and the US price.
The cointegration vector is then assumed to be the following one (equation
5.2):
88
swfr =
t − β0
− β1wreft
− β2regt
wreft
zt
where I(
0)
which means that, if hrwt > pintt, and then regt = 1, it becomes
swfr = β + β + β ) hrw + z
t
0
( 1 2
t
t
z t ≈ (5.2)
(5.3)