Responses of Agricultural Prices, Industrial Prices and the Agricultural Terms of Trade to Money Supply Shocks in Bangladesh, 1973M1-2006M6
This paper investigates the long-run relationship between money supply, agricultural prices and industrial prices and tests for the proposition that agricultural prices respond to monetary shocks more rapidly than industrial prices and therefore monetary policy may affect the agricultural terms of trade in the short-run, if not in the long-run. The long-run relationship between money supply, agricultural prices and industrial prices is investigated by the Engle-Ganger approach, the Johansen approach and the Autoregressive Distributed Lag bounds testing approach. The cointegration and error-correction tests results suggest that there exists a cointegral relationship between money supply, agricultural prices and industrial prices. The results obtained by the bounds testing approach are not consistent with the monetary neutrality proposition. The Wald test results suggest that the long-run coefficient on the money stock (narrow or broad) in the sectoral or the general price level relationship is significantly lower than one. The long-run coefficient on the money stock (narrow or broad) in the agricultural price relationship is also higher than that in the industrial price relationship, implying that an increase in the money supply has a long-run positive effect on the agricultural terms of trade. Finally, the Granger (predictive) causality test results and the impulse response analysis within a 3-variable vector error-correction modeling framework suggest that agricultural prices respond to monetary shocks more rapidly than industrial prices, implying that monetary shocks have a short run positive impact on the agricultural terms of trade.
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Volume (Year): 43 (2008)
Issue (Month): 1 (December)
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