Milk Market Integration between Hungary and Poland

In this paper we test the retail milk price integration between two countries, Poland and Hungary. Conventional linear cointegration methods do not reveal any relationship between the two prices, therefore we apply Gonzalo and Pitakaris (2006) method to test the linear cointegration null against the threshold cointegration with an exogenous threshold variable alternative hypothesis. Our results show, that the Hungarian Forint – Polish Zloty exchange rate is econometrically an appropriate threshold variable, the linearity null is rejected, and the two alternative regimes may be characterised with different long-run equilibrium relationships. Corresponding trade data however questions the economic appropriateness of the selected threshold variable. Further research is needed to analyse the actual effective milk trade flows between the two countries, subject to exchange rate variations.