Price Integration in MERCOSUR Countries: A Fractional Cointegration Analysis

This paper examines price integration in the MERCOSUR countries of Argentina and Brazil after the creation of this regional economic agreement using a fractional cointegration analysis. The results suggest that Argentine wheat and corn prices are fully cointegrated with the corresponding world prices, whereas Brazilian wheat prices are not cointegrated with the world price. These results support the idea that, for these markets, MERCOSUR is operating more like a free trade area than a customs union with harmonized trade policies. In case of soybean, neither soybean price is integrated with the world price, implying that both countries are pursuing similar export strategies that have the effect of isolating these markets from the world markets. Within MERCOSUR, Argentine and Brazilian wheat prices are fractionally cointegrated, suggesting that the LOP holds within MERCOSUR although the restoration of equilibria is slower than in the case of the fully cointegrated series. Similarly, Argentine and Brazilian soybean prices are fully cointegrated, suggesting a quick restoration of the equilibrium relationships. Based on the results, it appears that MERCOSUR has led to tightly agricultural markets in Brazil and Argentina while the relationships between the markets in the two countries and the corresponding world markets are subject to particular national policy interventions.