TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Analysis: Cointegration Models Accounting for Policy Regime Changes
and if hrwt < pintt, and regt = 0, the cointegration relation is instead
swfr = β + β pint
+ z
(5.4)
t
0
1
t
t
By combining the composite variable wref with the policy regime dummy, we
obtain a particular cointegration vector whose parameters depend on the policy
regime in place.
The cointegration vector was estimated with an OLS regression; its lagged
residuals (for which the null hypothesis of non-stationarity yields an ADF statistic
of -3.453, p-value 0.100) have been inserted in the VECM. Its estimates are
reported in table 5.8 78 . As expected, the elasticity of transmission is lower with the
US price (0.707-0.022) than with the intervention price (0.707), but, interestingly,
the difference doesn’t seem of a big magnitude. Moreover, such a value is
consistent with the ones estimated for Model 1.
α 3
LM test
OV test z t-1
ARCH (12)
Table 5.8 Model 3 estimates
∆swfr ∆hrw Cointegration vector
-0.073***
(0.023)
0.361
(p-value 0.993)
10.214
(p-value 0.006)
2.027
(p-value 0.999)
0.002
(0.028)
0.583
(p-value 0.910)
25.395
(p-value 0.013)
Standard errors are reported in parenthesis
LM: LM test with null hypothesis of no-autocorrelation
OV: Omitted Variable test (χ 2 )
* 10% significance; ** 5% significance; *** 1% significance
swfr = 1.
400*
* * + 0.
707wref
* * * − 0.
022*
* * reg wref
The omitted variable test for zt rejected the null hypothesis with a p-value of
0.006. Both adjustments coefficients have the right sign; only the French one is
significant. This means that the French price adjusts at a speed of about 7% per
month to the disequilibria from the long run relationship between the French price
and either the US or the intervention price, according to which of them is higher.
The US price seems instead to perform as weakly exogenous even if it can’t be
excluded that this is due to the fact that the intervention price intervenes in the
cointegration vector, and in some periods the US price is then expected to respond
78 Autocorrelation was removed by adding the 12 th differentiated lag. Monthly dummies were selected with
specification tests.
t
( 0.
205)
( 0.
040)
t
( 0.
002)
t
t
89