Cointegration and error correction modelling of agricultural commodity trade: The case of ASEAN agricultural exports to the EU

Abstract

The objecti e of this study is to increase our understanding of the specification and estimation of agricultural commodity trade models as well as to provide instruments for trade policy analysis. More specifically,the aim is to build a set of dynamic,theory-based econometric models which are able to capture both short-run and long-run effects of income and price changes,and which can be used for prediction and policy simulation under alternati e assumed conditions.A relati ely unrestricted,data determined,econometric modelling approach based on the error correction mechanism is used,in order to emphasise the importance of dynamics of trade functions.Econometric models are constructed for se en agricultural commodities –cassa a,cocoa,coconut oil,palm oil,pepper, rubber,and tea –exported from the Association of Southeast Asian Nations (ASEAN)to the European Union (EU).With the aim of providing broad commodity co erage,the intent is to explore whether the chosen modelling approach is able to catch the essentials of the behavioural relationships underlying the specialised nature of each commodity market. The import demand analysis of the study examines two key features:(1)the response of EU ’s agricultural commodity imports to income and price changes,and (2)the length of time required for this response to occur.The estimations of the export demand relationships provide tests whether the exporters ’ market shares are influenced by the le el of relati e export price,and whether exports are affected by ariations in the rate of growth of imports.The export supply analysis examines the relati e influence of real price and some non-price factors in stimulating the supply of exports.The lag distribution (the shape and length of the lag)is found to be ery critical in export supply relationships,since the effects of price changes usually take a long time to work themselves through and since the transmission of the price effects can be complex.The set of dynamic econometric models estimated in the study are then used to simulate the effects different types of trade policies.More specifically,attempts are made to quantify the effects of a unilateral tariff remo al by the EU,an imposition of export subsidies and taxes by the ASEAN countries as well as exchange rate adjustments on ASEAN agricultural exports to the EU. The results suggest that concepts such as cointegration and error correction specification are well suited for the study of agricultural trade flows,which are typically non-stationary time series.The error correction specification is found to provide a good representation of the data-generating process for agricultural commodity flows from ASEAN countries to the EU.Furthermore,the study shows the importance of inspection of the time series properties and the examination of both short-and long-run adjustment when studying trade functions.The different dynamic responses are often critical to the outcomes of the types of trade policies considered.;

Cointegration between gas and power spot prices

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