Price transmission and asymmetric adjustment in the US beef sector

Although recent research on price transmission has focused on asymmetric adjustments, these models generally require the functional relationships which underlie the price transmission process to be fundamentally linear. Recent developments in time-series analysis techniques have recognized the potential for nonlinear and threshold-type adjustments in error correction models. Threshold effects occur when larger shocks (i.e., shocks above some threshold) bring about a different response than do smaller shocks. The resulting dynamic responses may be of a non-linear nature in that they may involve various combinations of adjustments from alternative regimes defined by the thresholds. Threshold models of dynamic economic equilibria are usually motivated by adjustment costs, which may inhibit or otherwise constrain adjustments to small shocks. Put another way, a shock may have to be of a particular size before a significant response is provoked. This analysis evaluates price linkages among producer, wholesale, and retail marketing channels in U.S. beef markets. We utilize the threshold cointegration methods recently introduced by Balke and Fomby. In particular, a threshold error correction model allowing asymmetric adjustments is estimated and used to evaluate the dynamic time paths of price adjustments to shocks at each level in the U.S. beef marketing channel.