Market integration and price transmission in selected area of the South African market

Abstract

The present study addresses the issue of the market integration of an aspect of the South African market. The researcher investigates the mechanism of asymmetric price transmission using twelve macroeconomic variables. The analysis of price transmission of the select area of the South African market is useful for making inferences about the competitive environment and efficiency of the market in South Africa. Furthermore, this analysis is important for policymakers considering the challenges faced by the South African market in relation to world market. Using cointegration, causality, vector error correction mechanism, impulse response function and variance decomposition methods, the researcher finds asymmetries in the selected price chains. The empirical findings give evidence of existence of long-run equilibrium relationship between producer and consumer prices of goods, and that producer prices of goods Granger-causes consumer prices of goods, but not the reverse. The findings also indicate that transmission between consumer prices of goods and producer prices of goods is asymmetrical. It is further established that shocks from money supply M1 and GDP are the most important determinants in the variation in the consumer prices for housing while shocks from exchange rates and GDP were the most important determinants in the variation in producer prices for manufacturing food . An expansion of the study is needed to help improve the understanding of asymmetries in the South African market.