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Asymmetric Price Transmission along the European Food Supply Chain and the CAP Health Check: a Panel Vector Error Correction Approach

  • Anthony N. Rezitis and Andreas Rokopanos EMAIL logo
Published/Copyright: May 19, 2018
Journal of Agricultural & Food Industrial Organization
From the journal Journal of Agricultural & Food Industrial Organization Volume 17 Issue 2

Abstract

The 2003 CAP Reform commenced a liberal shift on the policies designed to protect farmers across Europe. The CAP Health Check of 2008 and the 2013 CAP Reform confirmed this change, adopting measures including the further decoupling of production, the abolishment of set-aside and the phasing-out of milk quotas. It is therefore expected that price transmission has been affected radically. This study investigates the price transmission mechanism along the European food supply chain, based on an asymmetric panel vector error correction model (VECM). Panel data on agricultural commodity (farmer), producer (processor) and consumer (retailer) prices from nineteen European countries are considered. The sample is split into two sub-periods, before and after the CAP Health Check, to examine how the price transmission mechanism has been affected. Cointegration is confirmed among the price series through the Pedroni tests and the long-run relationship is obtained with two estimation methods (i. e. fully modified OLS and dynamic OLS). Prior to the CAP Health Check, positive asymmetry is detected from farmer to processor and from processor to retailer. However, after the CAP Health Check price transmission becomes symmetric, thus suggesting that decreased support has resulted in a more efficient price transmission mechanism.

Keywords: asymmetric panel VECM; price transmission; error correction SUR
JEL Classification: Q11; C32; C33

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Appendix

A

The Bootstrap method

Assume the following set of equations Yi=Xibi+εi, i=1,2,…,n where n is the number of equations and in stacked form Y=Xb+ε, then the bootstrap technique is described as follows:

  1. Estimate b using bˆ.

  2. Obtain the residuals ε=Y−Xbˆ and stack them into a T × n matrix Eˆ=εˆ1,εˆ2,…,εˆn where n is the number of equations and T is the number of observations.

  3. Sample randomly with replacement T times from the rows of Eˆ to obtain εˆt∗, t=1,2,…, T and form E∗=εˆ1∗εˆ2∗⋮εˆT∗ .

  4. Form a pseudo-data sample or “bootstrap” sample Y∗=Xbˆ+ε∗ and apply the estimation procedure to the data Y∗,X to obtain the bootstrap coefficients bˆ∗.

  5. Repeat steps 3–4 a large number of times (B) obtaining bˆβ∗ where β=1,2,…, B.

  6. For the k-th coefficient bk calculate the following:

    1. The average of the bootstrap estimates of bk′s as the arithmetic mean bˆ‾k∗=1B∑β=1Bbˆβ,k∗

    2. The bootstrap estimate of the standard error of bk, sbˆk as the square root of the bootstrap estimate of the variance sbˆk=1B−1∑β=1Bbˆβ,k∗−bˆ‾k∗2.

    3. The estimated bias of the bootstrap estimator based on B replications, Biasbˆk=bˆ‾κ∗−bˆk.

    4. The bias-corrected estimator of bk, b˜k=bˆk−Biasbˆk=2bˆk−bˆ‾κ∗, where bˆ‾k∗=1B∑β=1Bbˆβ,k∗.

    5. Produce B test statistics t1∗,…, tB∗ where tβ,k∗=bˆβ,k∗−bˆk/sbˆβ,k∗. Considering a two-sided test H0: bk=0 against H1: bk≠0, the empirical distribution of t1∗,…, tB∗ ordered from smallest to largest and the distribution of the test statistic TN=bˆk−0/sbˆk is approximated as follows. For a non-symmetrical test, the bootstrap critical values at level α are the lower α/2 and the upper α/2 quantiles of the B ordered t-statistics t∗.

    6. The 100(1-α) percent confidence interval is [bˆk−t1−α/2∗×sbˆk, bˆk+tα/2∗×sbˆk], where bˆk and sbˆk are, respectively, the estimate and the standard error of the original sample.

Published Online: 2018-05-19

© 2019 Walter de Gruyter GmbH, Berlin/Boston

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https://doi.org/10.1515/jafio-2018-0002
Keywords for this article
asymmetric panel VECM; price transmission; error correction SUR

Articles in the same Issue

  1. Invited Paper
  2. Japanese Beef Tariffs: Beef Quality, Farm Programs, and Producer Compensation
  3. Research Articles
  4. Spillover Mechanisms in the WIC Infant Formula Rebate Program
  5. The Ambiguous Impact of Information Related to Fish Sustainability
  6. Food Retail Liberalization, Food Retail Structure and Food Prices: The Italian Case
  7. Asymmetric Price Transmission along the European Food Supply Chain and the CAP Health Check: a Panel Vector Error Correction Approach
  8. Russian Market Power in International Wheat Exports: Evidence from a Residual Demand Elasticity Analysis
  9. Patented Innovation and Firm Value in the U.S. Food and Drink Industry: The Economic Importance of High-Quality Product Innovation
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