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Abstract
This paper investigates the effects of state-dependent policy interventions on price
transmission. Our empirical application focuses on price linkages between the Ukrainian
wheat price and the world price. The empirical analysis is based on the smooth
transition conintegrating (STC) framework and follows the general procedures used
to investigate long-run equilibrium and short-run error correction. The results indicate
that there is regime-switching behavior in the long-run relationship between the
Ukrainian and world markets, conditional on the world price. When the world price
of wheat is below the threshold of $185/ton, the transmission elasticity of domestic
price with respect to the world price approaches unity. However when the world price
is above the threshold level, the transmission elasticity drops to 0.7. Finally, we also find that adjustments toward the long-run equilibrium take place through changes in
Ukrainian domestic price alone. Our results suggest that the Ukrainian wheat market
is well integrated into the world market. However, government intervention can cause
significant long-term losses for Ukrainian producers.