TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Analysis: Cointegration Models Accounting for Policy Regime Changes
Interestingly, for the French price, the adjustment coefficients of Model 1 and
3, in which the LOP holds between a combination of US and intervention prices,
are in between the two of Model 2 and 4, where they are allowed to vary
according to which price the LOP holds with.
This is valid also for Model 3 for the US price (in Model 1, the US price is not
present as such but in combination with the intervention price in wref).
The coefficients of the French price have always the expected sign, though
they are significant only when the intervention price is included in the
cointegration equations. US coefficients are instead significant only in Model 1.
To which extent the US price is weakly exogenous (Model 3) or the cointegrating
relationship is mainly driven by the intervention price (Model 2 and 4) requires
further research. Answering to this question poses some interpretative problems,
first of all because the intervention price is introduced as a threshold for the US
price but in theory, when below such threshold, the two might be expected to have
a diverging behaviour; and then also because the US price is assumed to be the
relevant world price, whereas in some years (namely, the campaign 2001/2002),
this might not have been the case.
5.3 Concluding remarks
In this chapter, the relation between soft wheat monthly prices for the US and
France in the years 1978-2003 has been studied by developing various empirical
models following the theoretical considerations made in chapter 4.
The econometric models presented, though simplified, are a first attempt of
combining policy and price data; the EU intervention price has then been used in
different ways to take into account the role played by policy regime changes. The
basic idea is that the intervention price acts as a threshold for the US price.
Although empirical evidence is mixed in this respect, in our data domestic
French prices turn out not to be cointegrated with the US ones. Indeed, what we
argue is that this confirms that the presence of EU domestic and border policies
prevents the two prices from sharing the same pattern, and need to be adequately
considered when testing for price transmission.
First of all, the regime switch has been modelled via the creation of a
composite variable, the “EU external reference price”, constituted by the
maximum between the US and the intervention price. Evidence of cointegration is
found with the French price. This means that, basically after the MacSharry
reform of 1993, which reduced the intervention price allowing the US one to be
much more often above it, the US prices interacted more with the EU domestic
ones. We might argue that the reduction in intervention prices, despite a nonchanging
system of policy barriers, was what actually increased the degree of
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