International price transmission on soft wheat markets: which role for policy variables in cointegration relationships?

This paper aims at considering policyregimes while studying international price transmissionmechanisms. The focus is on the soft wheat marketbetween the United States and the European Union inthe years 1978-2003. EU domestic and border policiesare expected to play a strong role; a theoreticalframework is developed in which the basic idea is thatthe intervention price acts as a threshold above whichthe EU and the US price can interact. A compositevariable, equal to the maximum between theintervention and the US price, is then introduced in acointegration model and its relation with the EU price isstudied. In addition to this, other models are estimated,in which the adjustment coefficients and the parametersof the cointegrating vector are allowed to vary accordingto the policy regime in place. All models yield consistentresults. The EU price reaction to the long run relationssuggests that the role of the US price can be understoodonly if policy regimes are adequately accounted for. Towhich extent the US price adjusts to disequilibriarequires further research.