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International price transmission in CGE models: How to reconcile econometric evidence and endogenous model response?


  • Siddig, Khalid
  • Grethe, Harald


The importance of empirically analyzing the transmission of international prices to and their impacts on domestic markets is growing particularly since the 2006–2008 food price hikes. However, the field is dominated by econometric Price Transmission Analysis (PTA) but surprisingly disconnected from analyses based on simulation models such as Computable General Equilibrium (CGE) models. The missing reconciliation among these tools could be due to PTA often being concerned with high frequency data and short-term adjustment processes, which does not reconcile well with the annual data of CGE analyses; different research teams in econometric time series analysis and CGE modeling with typically little overlap; and the endogeneity of price transmission in CGE models. Due to this endogeneity, the calibration of CGE models to empirically observed price transmission is not straightforward, as an infinite combination of model parameters and specifications allows for reaching a certain level of price transmission. This paper aims at paving the way for the integrated use of PTA and CGE models by analyzing how a given degree of price transmission from the international to the domestic market, which may be determined empirically e.g. based on a vector error correction model, can be met in a single country CGE model. We examine and validate seven hypothetical determinants including structural characteristics of the model, the parameterization of behavioral functions and properties of the sectors concerned. The findings of this paper support controlling the pass-through of prices from the international to the domestic market in CGE models.

Suggested Citation

  • Siddig, Khalid & Grethe, Harald, 2014. "International price transmission in CGE models: How to reconcile econometric evidence and endogenous model response?," Economic Modelling, Elsevier, vol. 38(C), pages 12-22.
  • Handle: RePEc:eee:ecmode:v:38:y:2014:i:c:p:12-22
    DOI: 10.1016/j.econmod.2013.11.038

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    References listed on IDEAS

    1. Delgado, Christopher L. & Minot, Nicholas & Tiongco, Marites M., 2003. "Evidence And Implications Of Non-Tradability Of Food Staples In Tanzania 1983-1998," 2003 Annual meeting, July 27-30, Montreal, Canada 22102, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Devarajan, Shantayanan & Lewis, Jeffrey D & Robinson, Sherman, 1993. "External Shocks, Purchasing Power Parity, and the Equilibrium Real Exchange Rate," World Bank Economic Review, World Bank Group, vol. 7(1), pages 45-63, January.
    3. Mundlak, Yair & Larson, Donald F, 1992. "On the Transmission of World Agricultural Prices," World Bank Economic Review, World Bank Group, vol. 6(3), pages 399-422, September.
    4. Channing Arndt & Rui Benfica & Nelson Maximiano & Antonio M. D. Nucifora & James T. Thurlow, 2008. "Higher fuel and food prices: impacts and responses for Mozambique," Agricultural Economics, International Association of Agricultural Economists, vol. 39(s1), pages 497-511, November.
    5. Inci Ötker & David Vávra & Francisco F. Vazquez & Luis Ignacio Jácome & Karl F Habermeier & Kotaro Ishi & Alessandro Giustiniani & Turgut Kisinbay, 2009. "Inflation Pressures and Monetary Policy Options in Emerging and Developing Countries—A Cross Regional Perspective," IMF Working Papers 09/1, International Monetary Fund.
    6. Nicita, Alessandro, 2005. "Multilateral trade liberalization and Mexican households : the effect of the Doha development agenda," Policy Research Working Paper Series 3707, The World Bank.
    7. Grethe, Harald & Siddig, Khalid H.A. & Goetz, Linde & Ihle, Rico, 2012. "How Do World Agricultural Commodity Price Spikes Affect The Income Distribution In Israel?," 52nd Annual Conference, Stuttgart, Germany, September 26-28, 2012 137154, German Association of Agricultural Economists (GEWISOLA).
    8. John Baffes & Bruce Gardner, 2003. "The transmission of world commodity prices to domestic markets under policy reforms in developing countries," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 6(3), pages 159-180.
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    Cited by:

    1. Antimiani, Alessandro & Costantini, Valeria & Paglialunga, Elena, 2015. "The sensitivity of climate-economy CGE models to energy-related elasticity parameters: Implications for climate policy design," Economic Modelling, Elsevier, vol. 51(C), pages 38-52.
    2. Khalid Siddig & Harald Grethe, 2013. "No more Gas from Egypt? The Israeli Gas Sector between Offshore Discoveries and Import Uncertainty," EcoMod2013 5446, EcoMod.
    3. Alessandro Antimiani & Valeria Costantini & Elena Paglialunga, 2015. "An analysis of the sensitivity of a dynamic climate-economy CGE model (GDynE) to empirically estimated energy-related elasticity parameters," SEEDS Working Papers 0515, SEEDS, Sustainability Environmental Economics and Dynamics Studies, revised Mar 2015.
    4. Olekseyuk, Zoryana & Schürenberg-Frosch, Hannah, 2016. "Are Armington elasticities different across countries and sectors? A European study," Economic Modelling, Elsevier, vol. 55(C), pages 328-342.
    5. Grethe, Harald & Siddig, Khalid H.A. & Goetz, Linde & Ihle, Rico, 2012. "How Do World Agricultural Commodity Price Spikes Affect The Income Distribution In Israel?," 52nd Annual Conference, Stuttgart, Germany, September 26-28, 2012 137154, German Association of Agricultural Economists (GEWISOLA).

    More about this item


    Price transmission; Sensitivity analysis; CGE models; Parameterization; International trade;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General


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