Price and exchange rate efects analysis on wheat flour prices in the city of São Paulo: an application of time series models

Abstract

This paper analysed the price elasticity transmission between the wheat flour prices in city of São Paulo, the wheat international price and the exchange rate. It was used several time series methods namely the following: unit root with structural break (PERRON, 1994), Granger causality test,Johansen Cointegration test, Vectorial Error Correction Model with restritions on long run parameters, variance decomposition of prediction error, impulse response function and exogeneity test. The theoretical model was based in the Law of One Price. The analysis period used was from January 1999 to December of 2005. The results showed that in the long run variations in the wheat international prices and exchange rate are fully transmitted into wheat flour prices in the São Paulo city, thus confirming the Law of One Price in this market.