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Relationship Between World and Domestic Prices of Raw Jute in Bangladesh: a Cointegration Approach

M.M.U. Molla
Agricultural Economics & Rural Sociology (AERS) Division, Agricultural Research Council, Farmgate, Bangladesh

S.A. Sabur
Department of Agribusiness & Marketing, Bangladesh Agricultural University, Mymensingh-2202, Bangladesh

M.J. Alam
Department of Agribusiness & Marketing, BAU, Mymensingh.-2202, Bangladesh

Abstract/ Executive Summary:

The study explores the dynamic relationship between world and domestic market prices of raw jute in Bangladesh. In the study, Johansen multivariate cointegration test was used, followed by error correction mechanism. Johansen cointegration model confirms that there is sufficient evidence to conclude that the Bangladeshi raw jute market is integrated with the world market in the long-run, while price signals are also being moderately transmitted in the short run. In other words, there was a moderate level of market integration between world and Bangladeshi raw jute market following trade liberalization policies implemented by Bangladesh. Therefore, additional government policies are needed to further enhance market integration. Such policies should focus on the reduction of non-tariff barriers designed to avoid sudden restriction on raw jute export, improve infrastructure, marketing systems and market information.

Keywords: Cointegration, Error correction, Raw jute, Short and long run equilibrium, Transmission, World and domestic prices.

Location:

Start Date:

End Date:

Program Area: Socio-economic and Policy

Commodity: Jute

Objectives:

to conduct empirical test of market integration between world and domestic raw jute in Bangladesh in a dynamic framework using a recent data set.

Methodology:

Sources of Data: In analyzing spatial integration, only monthly average prices of raw jute are available in unpublished form, which were collected from the Department of Jute, Government of the People’s Republic of Bangladesh. In the case of monthly export prices of raw jute, four major international markets namely, India, China, Pakistan and Vietnam were selected for measuring market integration. Because, they are the main importing countries of raw jute to the world market during the sample period. The period of world prices of raw jute (Taka/pucca bale) was considered from 2004-05 to 2010-11 on the basis of availability of data. Real prices were obtained by deflating the nominal prices with consumer price index (CPI). The prices are also transformed into logarithms in order to interpret the estimated parameters directly as elasticity's. E-views 7 programmes were used for data entry and data analysis. The study did not use any series that had more than two missing values in a raw. Individual missing values were fitted in using linear interpolation.

Econometric Framework: Time series analysis usually advocate differencing and pre-whitening of non-stationary series to estimate multivariate time series models. Critics have pointed out that such differencing filters out long-run information in data and study only the relationship between the changes in the variables. Most economic theories are in favour of long-term relationships among variables in the level form but not in the difference form. Cointegration modeling enables to study the dynamics of long-run equilibrium relationship in the level form. Since differencing is not required to achieve stationary, this procedure does not involve any loss of long-run information contained in the data. A cointegration analysis of time series leads to the construction of error correction models that enable separately the characterization of short-term relationship i.e. among stationery time series and long-term relationship i. e. relationship between non-stationery time series. In this study, standard time series techniques were used to estimate dynamic price relationships between world and domestic market of raw jute in Bangladesh. First, Augmented Dickey Fuller (ADF) test was used to determine if the price series contained a unit root. Optimal lag lengths were determined by the Akaike Information Criterion (AIC).

Johansen Cointegration Approach: The Johansen (1988) cointegration approach was used to estimate a stationary relationship between the markets.

Vector Error Correction Model (VECM): VECM to capture the short-run dynamic relationships and the speed of the adjustment toward a long-run equilibrium

Parameter Estimation: The cointegration vector (β) estimated from the Johansen model which is specified earlier measures the long-run elasticity of the Bangladeshi raw jute price with respect to world market price. The expected value of long-run elasticity is 0 < β ≤ 1. If β = 1, it implies that changes in world market price will be fully incorporated or transmitted to the Bangladeshi price in the long run. If 0 < β < 1, then Bangladeshi market only partially adjusts to the world market price movements in the long-run. Conversely, if β = 0, it implies that there is no pass through at all and the domestic market is an autarky. Short-run elasticity measuring changes in domestic market price with respect to the world market price changes is estimated by parameter vector (Ψ) in above equation. Specifically, it represents the percentage adjustment of Bangladeshi price following a j- period percentage change in the world market price. Similarly, the parameter vector (Γ) is an autoregressive term measuring the effect of each i-period change in the domestic market price on the change in current period domestic market price.

Source of Information: The Journal of Agriculture and Natural Resources Sciences. 2(1): 304-311. 2015, ISSN:2383-238X

Article Link (Online Journal): http://www.journals.wsrpublishing.com/index.php/tjanrs/article/view/178/426

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

The sector would adversely be affected by the higher volatility of the raw jute prices in Bangladesh. The study suggests that such policies should focus on the reduction of non-tariff barriers designed to avoid sudden restriction on raw jute export, improve infrastructure, marketing systems and market information.

Knowledge Management: Journal