Response of Ethiopian coffee price to the world coffee price: Evidence from dynamic ARDL simulations and nonlinear ARDL cointegration

Abstract

World coffee prices may have crucial implications on domestic prices of coffee. However, empirical evidence on the effect of world coffee prices on the price of coffee traded at the Ethiopian Commodity Exchange (ECX) is very scant. The main objective of this study is to analyze the response of the price of coffee traded at ECX to change in world coffee price. Monthly time series data ranging from July 2009 to June 2020 were used to address the objectives of this study. The result of the Kapetanios and Shin unit root test shows that majority of the series are stationary at first difference while some variables are stationary at level. The ARDL bounds test was applied to examine whether co-movement exists between the world coffee price and the price of coffee traded at ECX and the result reveals that the two prices are cointegrated. The nonlinear ARDL was applied to test the presence of asymmetric price transmission from the world coffee price to the ECX coffee price. The result reveals that there is an asymmetric price transmission both in the short-run and long-run. ECX coffee prices respond more to a positive shock in world coffee prices than a negative shock in the same variable. Results from the dynamic ARDL simulations reveal that a counterfactual shock in world coffee price has a long-lasting short-and long-term effect on ECX coffee price. The TY and frequency-domain Granger causality test results indicate that all variables except the exchange rate the world coffee price Granger cause ECX coffee price. The frequency-domain Granger causality test results show that world coffee price, economic growth, and money supply granger cause ECX coffee price in the long-run while trade openness and volume of coffee exported granger cause ECX coffee price in the short term. Policymakers should focus on improving competitiveness and transaction cost prevailing in the coffee market in Ethiopia.

Keywords:

• ECX coffee price
• world coffee prices
• dynamic ARDL simulations
• NARDL
• asymmetric price transmission

PUBLIC INTEREST STATEMENT

Understanding the effect of world commodity prices on the domestic price of the export commodities has substantial importance for policy making. This study aims to investigate the response of the price of coffee traded at the Ethiopian Commodity Exchange (ECX). This study reveals that the price of coffee traded at the ECX and the world coffee price are cointegrated/comove which indicated the coffee market integration. A shock in world coffee price transmits to the ECX coffee price asymmetrically. In the long run, the ECX price responds more to an increase in world coffee price than a decrease. The asymmetric price transmission indicates the presence of high transaction costs, weak competitiveness, and inefficiency in the Ethiopian coffee market. Moreover, results from simulation analysis show that a shock in world coffee price has a persistent asymmetric effect on the price of coffee traded at the ECX. The government of Ethiopia should work on improving the competitiveness and efficiency of the coffee market. Transaction costs and market power should be minimized to facilitate the fair transmission of coffee prices.

Availability of data and materials

The datasets used and/or analyzed during the current study are available from the corresponding author on reasonable request.

Disclosure statement

No potential conflict of interest was reported by the author(s).

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Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Shemelis Kebede Hundie

Shemelis Kebede Hundie is a lecturer at the Ethiopian Civil Service University, Ethiopia. His research interests lie in energy, environmental sustainability, firms’ innovation, and economic growth. Shemelis has published in Environmental Science and Pollution Research, Journal of Economic Structures, and Journal of Innovation and Entrepreneurship. Bane Biratu is an expert at the Ethiopia Commodity Exchange Authority. His research interests are project delay and project management and their effect on project performance.