Epsilon Archive for Student Projects

Abstract

Price is the most vital element in market interaction. If there is an international free trade
and the domestic market of one country is interconnected with the international market,
and if there is a price shocks in one market, the impact will have the same in the other
market. This is the major concept of price theory and the concept of price transmission
explored here.

This paper analyses the price transmission system on the level of the producer, the auction
market and the foreign (international) market in the Ethiopian coffee market in the short as
well as in the long run. The study cover the periods from December 1991 to April 2009,
based on 209 observations. Using the vector error correlation method and by using EVIEWS
and STATA software, the study attempts to examine the three most important elements in
price transmission analysis. These are causality, speed of adjustment and asymmetric
response.

The finding of this study shows that, there is a long run cointegration between these three
markets. The long run analysis further shows that if there is a 10% change auction market,
the long run impact on the producer price is 9.56%, implies these two markets moves closely
together in the long run. On the other hand, a 10% change in foreign price has only 6.5% and
5.7% impact on the auction and producer market respectively in the long run.

The result from the VEC model suggested that the adjustment coefficient for producer price
is only 3% if there is a shock in the foreign coffee market by one unit in the short run. This
means that only 3% of the shock is transmitted to the domestic market in each month. 3%
adjustment coefficient is quite small and insignificant. This indicates that lagged producer
price is insignificant in the foreign market. The result on the VECM indicates that the
producer market and the foreign market are poorly dependent and have very weak
relationships to one another as comparing to auction to the foreign market. Because of this,
the transmission period from producer market to foreign market takes more than 12
months.

This is a clear indication for the lack of market infrastructure, information asymmetry and
poor transportation system. A more organized market infrastructure may improve the
supply channel and thereby raise the farmer’s income.