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Monetary Impacts and Overshooting of Agricultural Prices in an Open Economy

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  • Sayed H. Saghaian
  • Michael R. Reed
  • Mary A. Marchant

Abstract

This article's focus is on the time adjustment paths of the exchange rate and prices in response to unanticipated monetary shocks. First, we expand the theoretical specification of the overshooting hypothesis by generalizing Dornbusch's model to include a third sector (i.e., agricultural prices). Second, we employ Johansen's cointegration test along with a vector error correction model to investigate whether agricultural prices overshoot in an open economy. The empirical results indicate that agricultural prices adjust faster than industrial prices to innovations in the money supply, affecting relative prices in the short run, but strict long-run money neutrality does not hold. Copyright 2002, Oxford University Press.

Suggested Citation

  • 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.
  • Handle: RePEc:oup:ajagec:v:84:y:2002:i:1:p:90-103
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    File URL: http://hdl.handle.net/10.1111/1467-8276.00245
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