International price transmission on soft wheat markets: which role for policy variables in cointegration relationships?
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This paper aims at considering policy
regimes while studying international price transmission
mechanisms. The focus is on the soft wheat market
between the United States and the European Union in
the years 1978-2003. EU domestic and border policies
are expected to play a strong role; a theoretical
framework is developed in which the basic idea is that
the intervention price acts as a threshold above which
the EU and the US price can interact. A composite
variable, equal to the maximum between the
intervention and the US price, is then introduced in a
cointegration model and its relation with the EU price is
studied. In addition to this, other models are estimated,
in which the adjustment coefficients and the parameters
of the cointegrating vector are allowed to vary according
to the policy regime in place. All models yield consistent
results. The EU price reaction to the long run relations
suggests that the role of the US price can be understood
only if policy regimes are adequately accounted for. To
which extent the US price adjusts to disequilibria
requires further research.