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Jonathan Brooks and Olga Melyukhina OECD

Estimating the Pass-Through of Agricultural Policy Reforms: an Application to Brazilian Commodity Markets. Jonathan Brooks and Olga Melyukhina OECD. Ad hoc World Outlook Group Meeting São Paolo, Brazil, 24-25 May 2004. Context.

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Jonathan Brooks and Olga Melyukhina OECD

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  1. Estimating the Pass-Through of Agricultural Policy Reforms: an Application to Brazilian Commodity Markets Jonathan Brooks and Olga Melyukhina OECD Ad hoc World Outlook Group Meeting São Paolo, Brazil, 24-25 May 2004

  2. Context • Aim is to track the effects for multilateral and own policy reforms down to the micro (household) level aggregate impacts, price transmission, micro-economy-wide impacts • Are the insights of wider relevance?

  3. Existing approaches (1) Correlations and simple regressions (2) Time series analysis based on the law of one price (3) Models that account for discontinuous arbitrage (4) Threshold models that combine (2) & (3). Trade-offs between rigour and operational ease

  4. Rm = Pd  [Pw + Tm] ≥ 0 Pd Rx = Pw – [Pd + Tx] ≥0 Pw+Tm Pw Pw-Tx M > 0 M, X = 0 X > 0 Pw + Tm>Pd >Pw - Tx PT and arbitrage condition

  5. R0 = 0 Pd0 Pw + T* ΔPd Pw Pd1 ΔPw Pw1 + T* R1 = 0 Pw1 j0 j1 The logic of price transmission (1) a case of competitive equilibrium : R0=0 ΔPd = ΔPw

  6. Pw + T* Pd: R0 < 0 R0 Pw ΔPd Pd1 ΔPw Pw1 + T* Pw1 j0 j1 The logic of price transmission (2) a case of segmented equilibrium: R0<0 ΔPd = ΔPw – R0

  7. Perfect and imperfect price transmission with efficient arbitrage

  8. How do we measure arbitrage rents? • We need to have measures of Tx and Tm • These can be estimated directly • Alternatively, by juxtaposing price and trade data we can infer the minimum (threshold) transaction costs needed for arbitrage to occur (T*)

  9. Threshold models • Capable of capturing the logic of arbitrage • Price-based techniques omit potentially important information, and thresholds may be due to factors other than transfer costs • But those making use of trade data are more difficult to apply • Most applications miss the fact that there are two equilibria • Other complications include asymmetric adjustment to price increases/decreases & to big/small changes • Degrees of freedom are not enough! • Difficult to obtain reliable estimates

  10. Cointegration results • Somewhat ambiguous, but most series I(1) with dry beans an exception • Proceed with cointegration tests, except for dry beans & maize • Results compared for full period (89-03), then pre-Mercosur (89-95) and post-reform (96-03) • Stronger transmission for exports / tradables • Results support hypothesis of discountinuous price transmission • Standard time series applications likely to be unreliable

  11. Suggested approach • If transfer costs matter, cointegration techniques may be unreliable • Threshold models are a possible remedy • But they are difficult to apply and may not be good predictors of the future • Alternatives are:(i) estimate transfer costs (directly or indirectly) and specify 3 values (0, partial, full) assuming efficient abritage (ii) estimate PT only over the interval where trade occurs • For our analysis, it is important that the results should have a clear economic interpretation

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