Market integration and exchange rates in primary commodity markets

Abstract

In most recent studies on international market integration exchange rates have not received much attention. This is in contrasts to the exchange rate pass-through literature where the degree of substitution normally is restricted. We revisit the seminal paper of Richardson (1978) that addresses the issue of exchange rate pass-through together with market integration, but in a multivariate cointegration framework. In addition to standard test like the law of one price and exchange rate pass-through, the multivariate cointegration framework allow us to test common assumptions like leading price, central markets, and exogeneity of exchange rates. This approach is particularly suited when studying markets for primary products. We provide empirical examples using salmon imports to Japan and fish meal exports from Peru to Germany.