TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Analysis: Cointegration Models Accounting for Policy Regime Changes
interaction between the EU internal prices and the US ones. By lowering
intervention prices, both export subsidies and variable levies were in fact reduced.
Secondly, a specific cointegration model has been estimated between the EU
and the US prices, with different adjustments coefficients depending on the
observable policy regime observations belong to. The LOP has been imposed
between the French price and the highest between the US and the intervention
price. The French price responds more to the LOP holding with the intervention
price, but also the adjustment coefficient to the LOP holding with the US price
has the correct sign. In turn, the interpretation of the coefficients of the US price is
somehow problematic.
Thirdly, it is the price transmission elasticity which has been allowed to
change, depending on the policy regime in place (once again, assuming that the
French price is linked to either the US or the intervention price according to which
of them is higher). The price transmission elasticity between the French and the
intervention price is found to be stronger than the one with the US price. The
French price adjusts to the disequilibria from the long run relation between the
French price and either the US price or the intervention price, according to which
of them is higher. The US price is weakly exogenous.
Finally, in Model 4, both adjustment coefficients and the cointegrating vector
parameters are allowed to vary. Results are consistent with the previous ones.
The models presented here, though over-simplified, represent an attempt of
explicitly combining policy and price data. The observable policy regime change
has been simulated with the construction of an ad hoc composite variable and
other econometric devices.
The consistent behaviour of EU adjustment coefficients suggests that the role
of the US price might be understood only in light of adequate consideration for
policy regimes.
The response of the French price is consistent throughout all the models: this
price responds correctly to the disequilibria from the various long run
relationships in which the intervention price has been introduced in different
ways. The adjustment coefficients always have the correct sign, although they
tend to be significant and higher in magnitude when the intervention price is
included in the cointegration vector. Indeed, they are bounded between -0.013
(response to the LOP holding with the US price; model 2) and -0.260 (response to
the LOP holding with the intervention price with a changing cointegration vector;
model 4). However, they tend to be around 0.100 (see all model 1 estimates;
model 3) when the wref series is included in the cointegration vector.
We could say that, once the EU regulatory framework has been taken into
account, a positive albeit small response to the behaviour of the US price emerges.
The response of the US price leaves instead some questions open. US
adjustment coefficients are usually much smaller in value and not significant
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