Structural breaks, cointegration and the domestic demand for chilean wine

Abstract

The domestic Chilean wine market is examined through the estimation of an error correction model allowing for structural breaks in the cointegrating vector. Our findings support both parameter instability and one structural break in the long-run relationship in 1982. The wine demand becomes more price-elastic and cross price-elasticity between wine and beer is found to be positive and close to one in the 1983-1998 period. This is in line with the growing substitutability between both wine varieties and wine and beer in Chile during the last two decades. The error correction parameter is found to be negative and highly significant supporting cointegration and suggesting a quick adjustment to long-run equilibrium.