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Considering threshold effects in the long-run equilibrium in a vector error correction model: An application to the German apple market

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Author Info
Goetz, Linde
von Cramon-Taubadel, Stephan
Abstract

We propose a three-step procedure to estimate a regime-dependent vector error correction model (VECM). In this model, not only the short-run adjustment process towards equilibrium is non-linear, as in threshold VECM and Markov switching VECM frameworks, but the long-run equilibrium relationship itself can also display threshold-type non-linearity. The proposed approach is unique in explicitly testing the null hypothesis of linear cointegration against the alternative of threshold cointegration based on the Gonzalo AND PITARAKIS (2006) test. The model is applied to apple price data on wholesale markets in Hamburg and Munich, using the share of domestic apples in total wholesale trade as the threshold variable. We identify four price transmission regimes characterized by different equilibrium relationships and short-run adjustment processes. This proposed approach is particularly suitable for capturing irregular seasonal threshold effects in price transmission typical for fresh fruits and vegetables.

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Paper provided by European Association of Agricultural Economists in its series 2008 International Congress, August 26-29, 2008, Ghent, Belgium with number 44247.

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Date of creation: 2008
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Handle: RePEc:ags:eaae08:44247

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Keywords: threshold cointegration; spatial price transmission; vector error correction model; Marketing;

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  3. Meyer, Jochen, 2004. "Measuring market integration in the presence of transaction costs--a threshold vector error correction approach," Agricultural Economics, Blackwell, vol. 31(2-3), pages 327-334, December. [Downloadable!] (restricted)
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  6. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January. [Downloadable!] (restricted)
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  7. John Baffes & Bruce Gardner, 2003. "The transmission of world commodity prices to domestic markets under policy reforms in developing countries," Journal of Policy Reform, Taylor and Francis Journals, vol. 6(3), pages 159-180, September. [Downloadable!] (restricted)
  8. Gonzalo, Jesus & Lee, Tae-Hwy, 1998. "Pitfalls in testing for long run relationships," Journal of Econometrics, Elsevier, vol. 86(1), pages 129-154, June. [Downloadable!] (restricted)
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  9. Jesús Gonzalo & Jean-Yves Pitarakis, 2006. "Threshold Effects in Cointegrating Relationships," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(s1), pages 813-833, December. [Downloadable!] (restricted)
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  10. Bakucs, L.Z. & Ferto, I., 2008. "Price transmission on the Hungarian milk market," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44175, European Association of Agricultural Economists. [Downloadable!]
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