ENDOGENOUS POLICY FORMATION: AN ECONOMETRIC AND SIMULATION ANALYSIS OF THE U.S. COARSE GRAINS SECTOR IN AN OPEN ECONOMY (UNITED STATES)

PRAVEEN DIXIT, Purdue University

Abstract

This study examined the simultaneous relationships between the private sector and government policy behavior for the U.S. coarse grains market. An econometric model which included supply, domestic use, export, stocks, and policy equations was estimated for the years 1963 through 1981. The endogenous policy variables included the effective support price, the loan rate, and the effective diversion payment rate. The model also included quasi-policy variables for non-recourse loan stocks, area set-aside, and program acres. The equations were estimated with an instrumental variable approach corrected for first-order serial correlation. The econometric results were found to be acceptable for simulation purposes. The Gauss-Seidel algorithm was used to solve the system of equations, empirically validate the model, and simulate alternative policy scenarios. Probable government response to potential exogenous economic shocks were analyzed by using a counterfactual approach for the years 1976 to 1981. Several conclusions were drawn from these simulation results. First, government response to changes in the economic environment was extremely "sticky". Large changes were required before the level of the government policy variables were altered significantly. Second, the government variables were more responsive to shocks that emanated from the domestic sector than those from the export market. Third, the model indicated that the government would respond to increases in the variable cost of producing coarse grains by increasing the effective support price and diversion payments. Fourth, a ceiling on the Farmer-Owned Reserve resulted in stocks being moved into government-owned Commodity Credit Corporation and privately held "free" stocks. Lastly, a proposal to base the loan rate on a moving average of market prices was evaluated. If two or more large shocks occur during a five-year interval, this approach increased loan rates but resulted in greater stability in the overall system than the current procedure for determining loan rates. The study offers a conceptually and empirically fruitful approach to endogenize government policy behavior in a commodity market model. Moreover, such models can provide a means to evaluate probable government response to changes in the economic environment within which commodity markets such as the U.S. coarse grains sector operate.

Degree

Ph.D.

Subject Area

Agricultural economics

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