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Dynamic Price Adjustment in Spatially Separated Food Markets with Transaction Costs

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  • Stefan Dercon
  • Bjorn Van Campenhout

Abstract

This paper presents an alternative technique to analyze market integration using price data, linking the cointegration version of Ravallion's dynamic model with the recent switching regression approaches as in Baulch's Parity Bounds Model. The Band- Threshold Autogression (Band-TAR) model allows for dynamic analysis of the adjustment process as well as for trade discontinuities and transaction costs, thereby avoiding some of the unrealistic assumptions of both approaches. We apply the model to the same rice price data on the Philippines as Baulch and find that, contrary to Baulch, the efficient arbitrage conditions are often not satisfied and unexploited profits are common, albeit relatively small. At least on one important trade route, we find evidence of substantial inefficiences.

Suggested Citation

  • Stefan Dercon & Bjorn Van Campenhout, 1999. "Dynamic Price Adjustment in Spatially Separated Food Markets with Transaction Costs," Working Papers Department of Economics ces9909, KU Leuven, Faculty of Economics and Business, Department of Economics.
  • Handle: RePEc:ete:ceswps:ces9909
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    Cited by:

    1. Stephens, Emma C. & Mabaya, Edward T., 2008. "Spatial Price Adjustment with and without Trade," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6538, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Tamru, Seneshaw, 2013. "Spatial integration of cereal markets in Ethiopia:," ESSP working papers 56, International Food Policy Research Institute (IFPRI).
    3. Ihle, Rico & von Cramon-Taubadel, Stephan, 2008. "A Comparison of Threshold Cointegration and Markov-Switching Vector Error Correction Models in Price Transmission Analysis," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37603, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    4. Intal, Ponciano Jr. S. & Ranit, Luis Osman, 2001. "Literature Review of the Agricultural Distribution Services Sector: Performance, Efficiency and Research Issues," Discussion Papers DP 2001-14, Philippine Institute for Development Studies.

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