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The Effect of Monetary Changes on Relative Agricultural Prices

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  • Asjaha, T.A.
  • Jooste, Andre
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    Abstract

    Relative change in agricultural prices determines farmers` investment decisions, productivity and income. Thus, understanding the factors that influence agricultural prices is fundamental for sustainable growth in this sector and the rest of the economy. This paper investigates the short- and long-run impacts of monetary policy changes on relative agricultural prices in South Africa by employing Johansen cointegration analysis and the Vector Error Correction Model (VECM) respectively. The results of Johansen cointegration analysis reject the long-run money neutrality hypothesis which suggests that the rate of increase in prices is not unit proportional to the rate of increase in money supply. On the other hand, the results of the dynamic relationships provide evidence of agricultural prices being overshot. Therefore, when a monetary shock occurs, the agriculture sector will have to bear the burden of adjustment, increasing farmersÂ’ financial vulnerability. Consumers also have to absorb short-run price volatility and overshooting of prices which in turn impacts on their ability to manage their cash flow optimally; this could be a substantial challenge in poor households. Due to the linkages between monetary policy variables and relative agricultural prices, it is recommended that agricultural policy makers and monetary authorities work closely in designing and implementing monetary policy in the country. This is important because monetary policies meant to stabilize the economy may have less desirable impacts on farmers and consumers, especially in the short run.

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    Bibliographic Info

    Article provided by Agricultural Economics Association of South Africa (AEASA) in its journal Agrekon.

    Volume (Year): 46 (2007)
    Issue (Month): 4 (December)
    Pages:

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    Handle: RePEc:ags:agreko:8016

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    Web page: http://www.aeasa.org.za/
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    Keywords: Monetary Policy; Error Correction Models; Agricultural Prices; Industrial Prices; Money Neutrality; Agricultural Finance; Financial Economics;

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    1. Rodrik, Dani, 2006. "Understanding South Africa's Economic Puzzles," CEPR Discussion Papers 5907, C.E.P.R. Discussion Papers.
    2. Sayed H. Saghaian & Michael R. Reed & Mary A. Marchant, 2002. "Monetary Impacts and Overshooting of Agricultural Prices in an Open Economy," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(1), pages 90-103.
    3. Kargbo, J.M., 2005. "Impacts of monetary and macroeconomic factors on food prices in West Africa," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 44(2), June.
    4. Frankel, Jeffrey A & Hardouvelis, Gikas A, 1985. "Commodity Prices, Money Surprises and Fed Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 425-38, November.
    5. Bakucs, Lajos Zoltan & Ferto, Imre, 2005. "Monetary Impacts and Overshooting of Agricultural Prices in a Transition Economy," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24711, European Association of Agricultural Economists.
    6. Shih-wen Hu & Vey Wang, 1996. "Commodity Price Dynamics and Anticipated Shocks," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 982-990.
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    Cited by:
    1. Khalid Mushtaq & Abdul Ghafoor & Abedullah & Farhan Ahmad, 2011. "Impact of Monetary and Macroeconomic Factors on Wheat Prices in Pakistan: Implications for Food Security," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(1), pages 95-110, Jan-Jun.
    2. Goodness C. Aye & Rangan Gupta, 2011. "The Effects of Monetary Policy On Real Farm Prices in South Africa," Working Papers 201119, University of Pretoria, Department of Economics.

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