ACCOUNTING FOR THRESHOLD COINTEGRATION IN A VECTOR ERROR CORRECTION MODEL: AN APPLICATION TO THE GERMAN APPLE

In this paper we propose a three-step procedure to estimate a regime-specific vector error cor-rection model (VECM). In our model, not only the short-run adjustment process towards equilibrium is non-linear, as in threshold VECM and Markov switching VECM frameworks, but also the long-run equilibrium relationship itself can display non-linearity, as a function of the size of a stationary threshold variable with respect to a threshold value. We apply this model to apple price data on wholesale markets in Hamburg and Munich, and identify four price transmission regimes characterized by different equilibrium relationships and short-run adjustment processes. This approach seems to be particularly suitable for cap-turing irregular seasonal threshold effects in price transmission typical for fresh fruits and vegetables