Disentangling nonlinearities in the long- and short-run price relationships: an application to the US hog/pork supply chain

Jean-Philippe Gervais
2011 Applied Economics  
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
more » ... en 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. . I am thankful for the comments and suggestions of three anonymous reviewers. I would also like to thank Barry Goodwin for providing useful comments on an earlier draft of this manuscript. The usual caveat about remaining errors applies.
doi:10.1080/00036840802600558 fatcat:u72an6ybxrgh5efsp4hjus47de