TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

6 EMPIRICAL ANALYSIS: COINTEGRATION
MODELS, STRUCTURAL BREAKS AND
POLICY REFORM
6.1 Introduction
In this last chapter, a further investigation of the relationship between the EU
and the US prices for soft wheat is proposed.
Differently from chapter 5, where a policy variable, the intervention price, was
introduced in the empirical models to consider policy regimes, here policy regime
changes will instead be assumed to be directly responsible for structural breaks in
the cointegration vector which links, in the long run, EU and US prices.
Our research question is as follows: did the CAP reforms and the URAA
implementation affect the relation between the two prices considered? We expect
that the first, by reducing intervention prices, should have reduced the distance
between EU and world prices; the second, by disciplining policy intervention,
should have increased the price transmission elasticity.
This means that no other variables are introduced in addition to the domestic
EU prices and the US ones; instead, the cointegration relationship is allowed to
vary according to the most relevant policy regime changes.
This represents an alternative development of the econometric estimates
proposed in chapter 5, that, focusing on the relationship between just the two
prices, allows to avoid some of the interpretative problems which have been
presented there. The underlying assumption here is that the two prices have
always been interacting despite the presence of domestic and border policies, and
that the policy regime switches had an impact on an existing relation.
The chapter is structured as follows. In paragraph 6.2, a short introduction to
the theoretical framework used is proposed, explaining what is the rationale
behind the use of cointegration models allowing for structural breaks in the
deterministic trend. In paragraph 6.3, unit root tests accounting for structural