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With the aid of the VECM (vector error correction model), this paper studied dynamic effect of wheat price and flour price conduction mechanism in the wheat industry chain. Study results indicate that in a long term, wheat price and flour price have equilibrium relationship. Through threshold co-integration test, it found that there is no threshold co-integration relationship between wheat price and flour price. This can be adjusted using the linear error correction mode (LECM). In a short term, the wheat price and flour price have Granger causality relationship. When the price deviates from equilibrium state, the flour price can be adjusted and regressed to equilibrium state, but the speed of wheat price regressing to equilibrium state is slow. Finally, the impulse response function analysis indicates that fluctuation of the wheat price can bring huge and sustained impact to wheat and flour market.


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