[OPE] Transmission of price shockers

From: Jurriaan Bendien <adsl675281@telfort.nl>
Date: Tue Sep 22 2009 - 16:57:12 EDT

Quiroz and Soto (1995) compute an aggregate transmission elasticity for
changes in agricultural world prices to domestic producer prices for 78
over 1966-91. They find that for the United States, 50 percent of world
price changes are transmitted to domestic prices within 2 years. Although
this result is not high in an absolute sense and is much lower than the
estimates for the United States from Tyers and Anderson, for the
Quiroz and Soto study the U.S. transmission elasticity is relatively high.
Only 4 of the 78 countries in the study-Australia, Canada, New Zealand,
and Uruguay-have a better transmission record than does the United States,
with half or more of a world price shock transmitted to domestic prices
within 1 year.

Quiroz and Soto find that most European countries show no transmission
between trade and domestic prices, even in the long run. The best European
performers are the United Kingdom, Italy, and Spain, which take 5-7 years
to transmit 50 percent of a change in world prices to domestic prices.
and Soto find no evidence of transmission for Japan, even in the long run.
developing countries, Quiroz and Soto calculate that about one-third show no
transmission even in the long run, while for the rest, the majority take at
5-7 years to transmit 50 percent of a world price shock to domestic prices.


Evidence regarding the impact of market conditions on price transmission is
rather general but nonetheless revealing. Fackler and Goodwin (2001) and
Barrett (2001) acknowledge that most empirical tests for agricultural
reject the "law of one price." This "law" states that if one adjusts for the
effects of market intervention policies and transport and transaction costs,
then a product should have the same price everywhere within a country (or
however one defines a market area). For traded goods, border prices should
equal domestic prices. The failure of empirical tests to support the law of
price may stem from problems with measurement, especially of transport and
transaction costs, which usually are quite challenging to gauge (see the
of Barrett concerning agricultural trade among Pacific Rim countries,
2001, p. 21-22). Yet, the empirical results suggest that in addition to
and transport and transaction costs, nonpolicy-related incomplete
could create gaps between border and domestic prices.


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