Making the Connection: A "Safe Island" in Segmented Markets?

Sammanfattning: Recent decades have seen substantial effort in devising appropriate policy measures to improve market integration in developing countries. Given a history of segmented markets and food insecurity, lack of market integration is particularly acute in Ethiopia. This empirical study analyses the impact of the introduction of the Ethiopia Commodity Exchange on market integration, defined in terms of price transmission. For this purpose, integration between four regional maize markets over the time period 2000-2013 is investigated, using cointegration techniques and an error correction framework. Given heterogeneity in results, no conclusive evidence for a change in market integration following the introduction of the exchange was found. While Engle and Granger cointegration tests weakly suggest a change in market integration, the Johansen test gives strong support for a change. Evidence for directionality in price transmission is found, indicating the presence of a central market. The study provides interesting policy implications, including the potential role of the ECX in the future.