Making the world market price endogenous within the AGMEMOD modelling framework: an econometric solution

This paper aims at making the world price endogenous within the AGMEMOD modelling approach. Thisapproach constructs country-level commodity market models where supply and demand sides are equalizedon the basis of the observed domestic prices. These prices are endogenous as they depend (pricetransmission 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 worldprice endogenous, we propose a system of equations where the EU key-price and the world price aresimultaneously 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 countriesremains unaffected. This approach is here applied to the case of soft wheat and results compared to thoseobtained by using the conventional AGMEMOD approach.