International price trasmission in the Chilean dairy market

Abstract

In an open economy like Chile, international prices influence domestic prices. This relationship can result in market distortions when price transmission is not instantaneous. In this sense, it becomes relevant to study this relationship in the Chilean dairy market to adopt policies to correct market failures. The objective of this research was to determine the extent to which export and import prices of dairy products are related to the price paid to dairy producers in Chile between the years 1990-2018. The methodology used was cointegration analysis and Error Correction Model (ECM). By applying the cointegration test, it was observed that that there is a long-term equilibrium relationship between local and export prices, but not with import price. The results of the ECM estimation between local and export prices indicate that both short-term and long-term adjustment coefficients are statistically significant. This indicates that the reference for industry pricing in Chile is export price. The magnitude of these parameters reveals that the variations in export price are not transmited instantaneously to local price.