World and Bangladesh Rice Market Integration: An Application of Threshold Cointegration and Threshold Vector Error Correction Model (TVECM)

This paper analysed the market integration between international and domestic market of rice covering the period of agricultural trade liberalization in Bangladesh. Policy makers are interested to know whether price changes in the world market are transmitted to the domestic market when there are some non-trade factors other than the trade liberalization that might affect the rice markets to be integrated. We used a threshold cointegration and threshold vector error correction model (TVECM) of Hansen and Seo (2002) to account for the affects of transaction cost (which is very substantial in the case of the developing countries) in the market integration. We found from Supremum Lagrange Multiplier (SupLM) test that Bangladesh rice market is partially integrated with the counterpart `world market`. Only one-third of the world price changes are got transmitted to domestic market. We also have found that the presence of the transaction cost affects in the rice market integration. So, it is clear that trade liberalization bring its expected outcomes for markets to be integrated but liberalization alone is not enough to explore the maximum benefit, there are some other factors such as non-tariff barriers and trade facilitations that should be seriously taken into consideration by the policy makers.