Making the world market price endogenous within the AGMEMOD modelling framework: an econometric solution
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This paper aims at making the world price endogenous within the AGMEMOD modelling approach. This
approach constructs country-level commodity market models where supply and demand sides are equalized
on the basis of the observed domestic prices. These prices are endogenous as they depend (price
transmission equation) on a EU key-price, which is, in turn, endogenously determined by the world price
(price formation equation). The world prices, however, are assumed to be exogenous. To make the world
price endogenous, we propose a system of equations where the EU key-price and the world price are
simultaneously determined. This system of equations, written in a dynamic and error-correction form
(VECM), substitutes the usual price-formation equation, while price transmission across EU countries
remains unaffected. This approach is here applied to the case of soft wheat and results compared to those
obtained by using the conventional AGMEMOD approach.