Disentangling non-linearities in the long- and short-run price relationships: An application to the U.S. hog/Pork supply chain

Increased concentration at the retail, food processing and farm input manufacturing levels has brought increased attention to patterns in retail-to-farm price spreads. Most studies documenting asymmetric price transmission focus on non-linear error correction processes, as opposed to the current study which analyzes potential non-linearities in the long-run relationship between the farm and retail prices. The null hypothesis of non-linearity in the long-run relationship between farm and retail prices in the U.S. hog/pork supply chain is rejected in favor of a Smooth Transition Cointegration (STC) framework. The STC framework predicts downward price stickiness in retail prices. The predicted residuals of the non-linear model are used to investigate whether it is possible to disentangle non-linearity in the long-run price relationship from non-linearity in the adjustment towards the long-run equilibrium. The results underline the importance of testing for linearity in the long-run price relationship before modeling non-linearity in short-run dynamics.Smooth transition cointegration; farm to retail price transmission; linear cointegration

Asymetric Price Transmission in the Spanish Lamb Sector

This paper aims to investigate the non-linear adjustments of prices between farm and retail prices in the lamb sector in Spain. The methodology used is based on the multivariate approach to specify and estimate a three-regime Threshold Autoregressive Model. Results indicate that in the long-run price transmission is perfect and any supply or demand shocks are fully transmitted along the marketing chain. In the short-run, price adjustments between the farm and the retail levels are asymmetric and are representative of a demand-pull transmission mechanism. On the other hand, retailers benefit from any shock, whether positive or negative, that affects supply or demand conditions.asymmetries, lamb, Spain, price transmission, Demand and Price Analysis, Livestock Production/Industries,

On the link between forward energy prices: A nonlinear panel cointegration approach

This paper investigates the relationship between forward prices of oil, gas, coal, and electricity using a nonlinear panel cointegration framework. To this end, we consider a panel of 35 maturities and control for the economic and financial environment using equity futures prices. Estimating the cointegrating relationship, we find that oil, gas and coal forward prices are positively linked, while the negative link between oil and electricity prices is consistent with a substitution effect between the two energy sources on the long run. Estimating panel smooth transition regression (PSTR) models, we show that the forward oil price adjustment process toward its equilibrium value is nonlinear and asymmetric, putting forward the key role played by self-sustaining dynamics and speculation phenomena.forward energy prices, speculation, panel cointegration, nonlinear model, PSTR

Cointegration and Forward and Spot Exchange Rate Regressions

In this paper we investigate in detail the relationship between models of cointegration between the current spot exchange rate, st, and the current forward rate, ft, and models of cointegration between the future spot rate, st+1, and ft and the implications of this relationship for tests of the forward rate unbiasedness hypothesis (FRUH). We argue that simple models of cointegration between st and ft more easily capture the stylized facts of typical exchange rate data than simple models of cointegration between st+1 and ft and so serve as a natural starting point for the analysis of exchange rate behavior. We show that simple models of cointegration between st and ft imply rather complicated models of cointegration between st+1 and ft. As a result, standard methods are often not appropriate for modeling the cointegrated behavior of (st+1, ft)' and we show that the use of such methods can lead to erroneous inferences regarding the FRUH.cointegration, exchange rates, forward rate unbiasedness, weak exogeneity

Seasonal cointegration and the stability of the demand for money

Studies on money demand in both developed and developing countries coincide in reporting systematic over predictions of monetary aggregates, non-robust estimated parameters and out-of-sample forecast variances that are too large to guide monetary policy. Several explanations have been given for these failures, including dynamic misspecification, omitted variables such as financial innovations, and non observed components. This paper explores an alternative, simpler way to approach the instability of money demand using seasonal-cointegration techniques. Using Chilean data we find that seasonal cointegrating vectors exist and, when omitted from the estimation, account for a substantial fraction of the observed instability in money demand functions. Because seasonal cointegrating vectors act as additional long-run restrictions, they can substantially reduce the variance of forecast errors. The estimated demand for money in Chile is remarkably stable in spite of the profound structural and financial reforms carried out throughout the 1977-2000 period, parameters are robust and similar to those suggested by economic theories.

A Model of Cross-Country House Prices (228.91 KB PDF)

The widespread nature of the recent international house price boom suggests that the underlying forces behind this sustained price increase may be common across countries. Many OECD countries have, over the past decade, witnessed sustained increases in living standards while housing affordability has further improved in recent years with the low interest rate environment experienced by many of these countries. In this paper we propose a theoretical model of house price determination that is driven by changes in income and interest rates. In particular, the current level of income and interest rates determine how much an individual can borrow from financial institutions to purchase housing and ultimately this is a key driver of house prices. The model is applied to a panel of 16 OECD countries from 1980 to 2005 using both single country-by-country and panel econometric approaches. Our results support the existence of a long-run relationship between actual house prices and the amount individuals can borrow and we find plausible and statistically significant adjustment, across countries, to this long run equilibrium.

How important is the stock market effect on consumption?

Many argue that the astonishing growth in Americans' stock portfolios in the 1990s has been a major force behind the growth of consumer spending. This article reviews the relationship between stock market movements and consumption. Using various econometric techniques and specifications, the authors find that the propensity to consume out of aggregate household wealth has exhibited instability over the postwar period. They also show that the dynamic response of consumption growth to an unexpected change in wealth is extremely short-lived, implying that forecasts of consumption growth one or more quarters ahead are not typically improved by accounting for changes in existing wealth. Finally, the impact effect of a wealth shock on consumption growth, while statistically positive, is found to be uncertain. Although recent market gains have provided support for consumer spending, the authors' findings are too limited to encourage reliance on estimates of the stock market effect in macroeconomic forecasts.Stock market ; Consumption (Economics)

Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots

This paper is an introduction to unit root econometrics as applied in macroeconomics. The paper first discusses univariate time series analysis, emphasizing the following topics: alternative representations of unit root processes, unit root testing procedures, the power of unit root tests, and the interpretation of unit root econometrics in finite samples. A second part of the paper tackles similar issues in a multivariate context where cointegration is now the central concept. The paper reviews representation, testing, and estimation of multivariate time series models with some unit roots. Two important themes of this paper are first, the importance of correctly specifying deterministic components of the series, and second, the usefulness of unit root tests not as methods to uncover some "true relation" but as practical devices that can be used to impose reasonable restrictions on the data and to suggest what asymptotic distribution theory gives the best approximation to the finite-sample distribution of coefficient estimates and test statistics.Economic