Price Transmission Subject to Security‐based Trade Barriers in the Context of the Israeli‐Palestinian Conflict

Israel’s imposition of military security measures in the Palestinian territories as a consequence of the long-lasting violent conflict yields depressing economic effects to all parties involved. One crucial implication is the limited ability to carry out trade which brings about welfare losses. This paper assesses the consequences of the Israeli-Palestinian conflict on price dynamics of agricultural trade between Israel and the West Bank by analyzing daily wholesale prices subject to movement restrictions. An exogenous regime switching cointegration model is estimated using a novel extension of the Johansen estimation method. We find Hebron and Tel Aviv wholesale markets to be integrated for the main trading products. Deviations from price equilibrium are quickly adjusted for. The model suggests that the movement restrictions temporarily cut off both markets from each other. Welfare implications of the closures depend on the direction of trade, harming both Palestinian and Israeli consumers.