Threshold Cointegration and Price Transmission when Expectations Matter

Sergio Lence (), GianCarlo Moschini and Fabio Santeramo

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: We examine the performance of the threshold cointegration approach, specifically Band-TVECM, to price transmission analysis in an explicit context where trade decisions are made based on expectation of final prices, because trade takes time. We find that, following a standard inference strategy, a large portion of three-regime cases are not identified as such. Results show that transfer costs are systematically underestimated, particularly in three-regime models. The speed of price transmission is also biased in three-regime models. Furthermore, inferences about occurrence of trade are poor, with estimated models suggesting far lower market integration than is true in the data generating process .

Date: 2017-07-01
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genstf:201707010700001575

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