Modeling Price Transmission between Farm and Retail Prices: A Soft Switches Approach

William Hahn (), Hayden Stewart, Don Blayney and Christopher G. Davis

No 204951, 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California from Agricultural and Applied Economics Association

Abstract: Vector error correction models (VECM) are used to model price transmission when farm and retail prices are cointegrated. To allow for non-linearity in the cointegration process, researchers may specify thresholds to break the error correction process into regimes according to whether the retail price is above, below, or close to its equilibrium value given farm prices. However, because the coefficients in a VECM can change when there is movement from one regime to another, the model can be discontinuous. This implies sudden, “hard” regime changes. In this study, we extend the threshold VECM to include features of STAR models. Our approach allows for gradual, soft regime changes. An empirical application to retail cheese and farm milk price is presented.

Keywords: Agricultural and Food Policy; Demand and Price Analysis; Research Methods/Statistical Methods (search for similar items in EconPapers)
Pages: 33
Date: 2015-05-20
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Citations: View citations in EconPapers (2)

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Journal Article: Modeling price transmission between farm and retail prices: a soft switches approach (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea15:204951

DOI: 10.22004/ag.econ.204951

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