Monetary Impacts and Overshooting of Agricultural Prices in a Transition Economy: The Case of Slovenia

The paper focus on the time adjustment paths of the exchange rate and agricultural producer and industrial prices in response to unanticipated monetary shocks following model developed by Saghaian et al. (2002). We employ Johansen's cointegration test along with a vector error correction model to investigate whether agricultural producer prices overshoot in a transition economy. 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. The impulse response analysis shows that an exogenous shock to the money supply has a significant and volatile effect on the three price variables. Initially, both the agricultural producer prices and industrial prices undershoot their long-run path. Industrial prices recover in the fourth, agricultural producer prices in sixth month. The extent of overshooting in agricultural prices is twice as large as for exchange rates or industrial prices. This indicates that in the case of monetary shocks the sectors associated with flexible changes bear the burden of adjustment vis-à-vis the sectors with sticky changes. The exchange rate pass-through on agricultural producer prices revealed by the forecast error variance analysis indicates the relatively greater importance of the exchange rate than the money supply in explaining the expected variation of the agricultural producer price. This is consistent with floating exchange rate policy, while agricultural trade policy for sensitive products has been more restricted until Slovenia joined the European Union.