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Abstract
Based on their theoretical predictions, Kliauga, de Gorter, and Just (2008) and de Gorter,
Drabik, and Just (2010) argue that the United States and the European Union establish the world
ethanol and biodiesel prices, respectively. We test these theories using cointegration analysis
and the Vector Error Correction (VEC) model. Weekly price series are analyzed for the major
global biofuel producers (European Union, United States, and Brazil) for the period 2002 –
2010. Polices in the United States and Brazil appear to play an equal role in determining ethanol
prices in other countries, thus only partially confirming the theoretical predictions. For biodiesel,
our results demonstrate that the EU mandate impacts the world biodiesel price and thus they
confirm the European Union’s price leadership established in theory.