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

Gervais, Jean-Philippe (2007): Disentangling non-linearities in the long- and short-run price relationships: An application to the U.S. hog/Pork supply chain.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Smooth transition cointegration; farm to retail price transmission; linear cointegration
• Subjects: Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q11 - Aggregate Supply and Demand Analysis ; Prices; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes