The effects of monetary policy on US agricultural markets: An integrated capital market approach
Abstract
Since the mid-1970s many countries have begun to dismantle sets of regulations that restrict flows of financial capital between countries. As a result of this ongoing process of deregulation, US interest rates are currently determined in an open economy setting. Open economy determination of US interest rates is germane to US agriculture because of its dependence on credit and export markets. The objective of this research is to model linkages between the US agricultural sector and the US macroeconomy in order to determine how the agricultural effects of US monetary policy change as the world financial assets market becomes more highly integrated. An econometric model of the US corn, wheat, cattle, hogs and broiler markets was specified and estimated with linkages to the macroeconomy and the world financial asset market made explicit. The agricultural model was solved with macrolinkage variables generated by the Federal Reserve Bank Multicountry Model (MCM), under a restrictive monetary scenario. The restrictive monetary scenario induced minor changes in US corn, wheat, cattle, hog and broiler markets. Private stocks in the US corn and wheat markets sustained the greatest impact of the restrictive monetary policy. Private ending stocks of corn decreased 7 percent averaged over 1981-1985. Private ending stocks of wheat declined 7 percent, averaged over the same period. Livestock component response to the money shock was marginal. Real steer prices decreased approximately 2 percent; cow inventory and beef production declined marginally. Real hog price decreased 0.5 percent, while sow inventory declined by.9 percent. Real broiler prices decreased 4 percent, and production declined marginally. Simulation of further integration of world financial asset markets with an econometric model of the macroeconomies of the US, the EC, and Japan indicates that agricultural effects of US monetary policy are sustained by US agriculture early in the simulation period, and that the monetary policy-induced effects in US corn, wheat, cattle, hog and broiler markets are temporary.
Degree
Ph.D.
Advisors
Paarlberg, Purdue University.
Subject Area
Agricultural economics
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