Wheat / Flour Price Transmission and Agricultural Policies in Ukraine: A Markov-Switching Vector Error Correction Approach

The analysis of price transmission between raw and processed agricultural products in transition countries is complicated by the frequently changing conditions on their way from plan to market. We utilise a Markov-switching vector error correction model to allow for multiple regime shifts in the price relationship between wheat and wheat flour in Ukraine from June 2000 to November 2004. The analysis reveals four regimes. The observed temporal pattern of these regimes can be matched with certain political and economic events in Ukraine. In particular, we find a strong link between the 'high uncertainty' regime and discretionary policy interventions in 2003.