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RELATIVE AGRICULTURAL PRICE CHANGES IN DIFFERENT TIME HORIZONS
Abstract
Using a monthly data covering from 1974:1 to 2002:12, this paper explores the linkage between changes in macroeconomic variables (real exchange rate and inflation rate) and changes in relative agricultural prices in different time horizons (1, 12, 24, 36, 48, and 60 months). Controlling for factors likely to determine the long run trend of relative agricultural prices, the results show that long-term changes in real exchange rate has had a significant negative correlation with the long-term changes in relative agricultural prices. Conversely, changes of the general price have a role in explaining short-term changes in relative agricultural price at best.
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This paper presents support for long-run monetary neutrality based on evidence that individual time series for money, manufacturing
prices, and agricultural prices are nonstationary but cointegrated, with a stationary proportional long-run relationship among
their levels. Dynamic simulations from a vector error-correction model with this restriction imposed show that monetary shocks
shift relative prices in favor of agriculture in the short run and permanently raise nominal prices. Manufacturing price shocks
have similar long-run effects but initially place agriculture in a cost-price squeeze, while agricultural price shocks are
transitory and have little impact on the other series.
Many explanations of real exchange rate movements focus on monetary shocks, but it is often found empirically that monetary shocks are unimportant. I provide contrary evidence. Using over 100 years of data, I estimate the contribution of various shocks to explaining variation in the real pound–dollar rate. Several VAR specifications provide a range for their contributions: from 19 to 60% for monetary shocks and 4 to 26% for fiscal and productivity shocks combined. I compare this to related work. My results lend empirical support to the convention in recent quantitative general equilibrium modeling of focusing on monetary shocks.
This paper investigates the effects of shocks to U. S. monetary policy on exchange rates. We consider three measures of these
shocks: orthogonalized shocks to the federal funds rate, orthogonalized shocks to the ratio of nonborrowed to total reserves
and changes in the Romer and Romer index of monetary policy. In sharp contrast to the literature, we find substantial evidence
of a link between monetary policy and exchange rates. Specifically, according to our results a contractionary shock to U.
S. monetary policy leads to (i) persistent, significant appreciations in U. S. nominal and real exchange rates and (ii) significant,
persistent deviations from uncovered interest rate parity in favor of U. S. interest rates.
We survey the empirical literature on floating nominal exchange rates over the past decade. Exchange rates are difficult to forecast at short- to medium-term horizons. There is a bit of explanatory power to monetary models such as the Dornbusch 'overshooting' theory, in the form of reaction to 'news' and in forecasts at long-run horizons. Nevertheless, at short horizons, a driftless random walk characterizes exchange rates better than standard models based on observable macroeconomic fundamentals. Unexplained large shocks to floating rates must then, logically, be due either to innovations in unobservable fundamentals, or to non-fundamental factors such as speculative bubbles. The observed difference in exchange rate and macroeconomic volatility under different nominal exchange rate regimes makes us skeptical of the first view. The theory and evidence on speculative bubbles, however, is not conclusive. We conclude with the hope that promising new studies of the microstructure of the foreign exchange market might eventually rise to insights into these phenomena.
We introduce adaptive learning behavior into a general-equilibrium life-cycle economy with capital accumulation. Agents form forecasts of the rate of return to capital assets using least-squares autoregressions on past data. We show that, in contrast to the perfect-foresight dynamics, the dynamical system under learning possesses equilibria that are characterized by persistent excess volatility in returns to capital. We explore a quantitative case for theselearning equilibria. We use an evolutionary search algorithm to calibrate a version of the system under learning and show that this system can generate data that matches some features of the time-series data for U.S. stock returns and per-capita consumption. We argue that this finding provides support for the hypothesis that the observed excess volatility of asset returns can be explained by changes in investor expectations against a background of relatively small changes in fundamental factors.
U.S. agriculture is a spectacular success story of high productivity growth maintained over an amazingly long period of time. Nevertheless, the industry today suffers from the same problems it has always suffered from: droughts, locusts and market disruptions. In this article, Kevin Kliesen and William Poole explain how monetary policy can contribute to a healthy agriculture sector. The reality is that the fundamental economic forces controlling the destiny of agriculture-high productivity growth, the hazards of nature, the low price and income elasticities of demand, and the instability of conditions in important export markets-are things that the Fed can do nothing about. The main message is that the best the Fed can do to stabilize the agricultural sector is to maintain low and steady inflation.
The US twin deficit, Western European economic integration, Eastern Europe's transition towards a market economy, the debt burden of the Less Developed Countries, the growing and deepening discrimination against the rest of the world by new homogeneous areas such as the North America free trade area, the new Europe, and Japan are the issues at the heart of global disequilibrium in the world economy. This book brings together leading economists to analyse these issues and further the debate on the need for sound economic policies to avoid a crash on a global scale.
Monetary policy has important effects on agricultural commodity prices because, though they are flexible, other goods prices are sticky. This paper formalizes the argument by applying the Dornbusch overshooting model. A decline in the nominal money supply is a decline in the real money supply in the short run. It raises the real interest rate, which depresses real commodity prices. They overshoot their new equilibrium in order to generate an expectation of future appreciation sufficient to offset the higher interest rate. These real effects (which vanish in the long run) also result from a decline in the money growth rate.
Previous analyses of trade and development problems of U. S. agriculture have neglected the role of exchange rate policy.
An attempt is made to understand the role of the exchange rate on these problems in a non-parametric fashion by means of a
model of induced technical change. It is argued that the overvaluation of the dollar and the policy measures to combat it
aggravated the adjustment problems of U. S. agriculture, especially during the 1950's, and resulted in shifting an important
share of the benefits of technical change to the consumer. Moreover the recent devaluation of the dollar constitutes an important
structural change for U. S. agriculture.
This chapter presents a critical survey and an interpretation of recent exchange rate research. It focuses on empirical results for exchange rates among major industrialized countries. The expectations of future exchange rate changes are a key determinant of asset demands, and therefore of the current exchange rate. The expectations variable is relatively straightforward in the conventional monetary models; in theoretical terms , it is determined by the rational expectations assumption, while in empirical terms, it is typically measured by the forward discount or interest differential. The standard empirical implementation of rational expectations methodology infers ex ante expectations of investors from ex post changes in the exchange rate. Unexpected changes in monetary policy frequently cause movements in the exchange rate in the direction hypothesized by the sticky-price monetary model. The chapter presents a survey of the work on exchange rate determination in floating rate regimes. It considers evidence across exchange rate regimes and examines the issue of speculative bubbles. It also reviews some relatively new directions in exchange rate research that focus on the micro-structure of foreign exchange markets.
Recently, methods for detecting unit roots in autoregressive and autoregressive-moving average time series have been proposed. The presence of a unit root indicates that the time series is not stationary but that differencing will reduce it to stationarity. The tests proposed to date require specification of the number of autoregressive and moving average coefficients in the model. In this paper we develop a test for unit roots which is based on an approximation of an autoregressive-moving average model by an autoregression. The test statistic is standard output from most regression programs and has a limit distribution whose percentiles have been tabulated. An example is provided.
Generalized financial volatility is capitalism's Achilles' heel. And nowhere is the problem of controlling such volatility more acute than in monetary and exchange-rate relationships across countries - the central theme of this book. The Rules of the Game brings together essays, written over the course of thirty years, by a major figure in the field that analyze and compare a wide variety of important international monetary regimes. These range from the establishment of the gold standard in the nineteenth century through Bretton Woods, the dollar standard, floating exchange rates, the European Monetary System, to current proposals for reforming world monetary arrangements. The essays are unique in that they specify precisely the rules of the game for each international monetary regime - past, present, and future. For ease of reference, the book offers boxed summaries of each set of rules and then discusses their advantages and disadvantages from the gold standard down to the author's proposal for a common monetary standard for the twenty-first century. Part I assesses each monetary regime's success in stabilizing prices and exchange rates, while fostering international trade. Part II addresses a central question each country faces: what are the benefits of giving up exchange-rate flexibility to join a common monetary standard? Part III focuses on overall monetary reform for limiting financial volatility and exchange-rate crises in the next century - including whether or not Western Europe should adopt a common currency. The last chapter synthesizes and updates the author's previous writings on rationalizing monetary arrangements among the major industrial countries of North America, Western Europe, and East Asia.
This book describes and evaluates the literature on exchange rate economics. It provides a wide-ranging survey, with background on the history of international monetary regimes and the institutional characteristics of foreign exchange markets, an overview of the development of conceptual and empirical models of exchange rate behavior, and perspectives on the key issues that policymakers confront in deciding whether, and how, to try to stabilize exchange rates. The treatment of most topics is reasonably compact, with extensive references to the literature for those desiring to pursue individual topics further. The level of exposition is relatively easy to comprehend and the chapters are written at a level intelligible to first-year graduate students or advanced undergraduates. The book will enlighten both students and policymakers, and should also serve as a valuable reference for many research economists.
In this paper, we estimate the (long-run) intertemporal elasticity of substitution of non-durable consumption, which has often been estimated with the generalized methods of moments (GMM). The GMM estimator, however, is not consistent in the presence of liquidity constraints, aggregation over heterogeneous consumers, unknown preference shocks, or a general form of time-nonseparability. We use Engle and Granger's cointegration methodology in order to develop an estimator which is consistent even in the presence of these factors. We then form a formal test that compares the estimates obtained using cointegration techniques with those obtained using GMM.
We consider a nonstationary vector autoregressive process which is integrated of order 1, and generated by i.i.d. Gaussian errors. We then derive the maximum likelihood estimator of the space of cointegration vectors and the likelihood ratio test of the hypothesis that it has a given number of dimensions. Further we test linear hypotheses about the cointegration vectors.The asymptotic distribution of these test statistics are found and the first is described by a natural multivariate version of the usual test for unit root in an autoregressive process, and the other is a χ2 test.
The paper considers the effect of inflation on the relative prices of products traded in auction markets. Prices of US agricultural products are used for the period 1951–1981. Since agricultural products are widely traded, the real forces of supply and demand specific to agriculture are represented by foreign agricultural prices. The exchange rate is entered as a separate variable influencing domestic agricultural prices. Trade between the USA and the ten countries included in the Federal Reserve Board's trade-weighted dollar is considered. The empirical results are consistent with the hypothesis that inflation did not alter relative agricultural prices, when the real forces of supply and demand and the exchange rate are held constant.
The authors present a simple overlapping generations model of an asset market in which irrational noise traders with erroneous stochastic beliefs both affect prices and earn higher expected returns. The unpredictability of noise traders' beliefs creates a risk in the price of the asset that deters rational arbitrageurs from aggressively betting against them. As a result, prices can diverge significantly from fundamental values even in the absence of fundamental risk. Moreover, bearing a disproportionate amount of risk that they themselves create enables noise traders to earn a higher expected return than rational investors do. The model sheds light on a number of financial anomalies. Copyright 1990 by University of Chicago Press.
It is sometimes asserted that rational speculative activity must result in more stable prices because speculators buy when prices are low and sell when they are high. This is incorrect. Speculators buy when the chances of price appreciation are high, selling when the chances are low. Speculative activity in an economy in which all agents are rational, have identical priors, and have access to identical information may destabilize prices, under any reasonable definition of destabilization. It takes extremely strong conditions to ensure that speculative activity (of the commodity storage variety) "stabilizes" prices, even in a very weak sense.
The paper develops a natural measure of the amount of relative price variability. The variance of relative price change is shown to be correlated with the rate of change in the price level using data for consumer goods in both the Netherlands and the United States. This association has been noted in other data for a variety of countries. Using a multisectoral supply-and-demand framework, the paper goes on to show how changes in relative prices and ultimately the variance of relative price changes are related to supply conditions changes in real income and the amount of unanticipated inflation. The model is used as the basis for an analysis of movements in the prices of consumer goods in the United States for the period 1929-75. The amount of unanticipated inflation (measured as the difference between the actual rate and a time-series predictor) is a more important determinant of relative price variability than the rate of inflation.
The authors test whether the time-series positive correlation of inflation and intermarket relative price variability is also present in a cross section of U.S. cities. They find this correlation to be a robust empirical regularity: cities that have higher than average inflation also have higher than average relative price dispersion, ceteris paribus. This result holds for different periods of time, for different classes of goods, and across different time horizons. The authors' results suggest that at least part of the relationship between inflation and relative price variability cannot be explained by monetary factors. Copyright 1997 by the University of Chicago.
This paper analyzes the effects of inflation on the dispersion of prices, and other aspects of price behavior, using disaggregated data on prices of foodstuffs in Israel during 1978-84. The authors find that expected inflation has a stronger effect on intramarket price variability than unexpected inflation. They show that even in times of high inflation price quotations are not trivially short and that price changes are not synchronized across firms. These facts, taken together, confirm that there is some staggering in the setting of prices. The authors find that the distribution of real prices is not uniform as many menu cost-based models assume or conclude. Copyright 1992 by University of Chicago Press.
The authors present a model of portfolio allocation by noise traders with incorrect expectations about return variances. For such misperceptions, noise traders who do not affect prices can earn higher expected returns than rational investors with similar risk aversion. Moreover, such noise traders can come to dominate the market in that the probability that they eventually have a high share of total wealth is close to one. Noise traders come to dominate despite their taking of excessive risk and their higher consumption. The authors conclude that the case against their long-run viability is not as clear-cut as is commonly supposed. Coauthors are Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann. Copyright 1991 by University of Chicago Press.
This paper proposes a theory of supply shocks, or shifts in the short-run Phillips curve, based on relative-price changes
and frictions in nominal price adjustment. When price adjustment is costly, firms adjust to large shocks but not to small
shocks, and so large shocks have disproportionate effects on the price level. Therefore, aggregate inflation depends on the
distribution of relative-price changes: inflation rises when the distribution is skewed to the right, and falls when the distribution
is skewed to the left. We show that this theoretical result explains a large fraction of movements in postwar U. S. inflation.
Moreover, our model suggests measures of supply shocks that perform better than traditional measures, such as the relative
prices of food and energy.
The asymptotic distributions of cointegration tests are approximated using the Gamma distribution. The tests considered are for the I(1), the conditional I(1), as well as the I(2) model. Formulae for the parameters of the Gamma distributions are derived from response surfaces. The resulting approximation is flexible, easy to implement and more accurate than the standard tables previously published.
This study divides the U.S. economy into the agricultural and industrial sectors and compares the degree of involvement of exchange rates in each sector without specifying the rigid assumption of either exogeneity or endogeneity of exchange rates. Both short- and long-run impacts of shocks in the exchange rate are found to be significant. However, the effect of an exchange rate shock on the agricultural sector is larger than that on the industrial sector. This study examines a fundamental question about the role of the exchange rate in the two sectors. The exchange rate is exogenous in the agricultural sector, while being endogenous in the industrial sector.
The authors show that Richard W. Parks' (1978) widely cited evidence on the correlation between the rate of inflation and the variability of relative prices in the United States during 1948-75 depends on one observation, 1974. When the sample period is extended through 1989, the correlation depends on the observations for 1974 and 1980. Since both are years of large oil price shocks, the authors make the case that causation is likely to run from these shocks to relative price variability and inflation with accommodating monetary policy playing a role. Copyright 1993 by Ohio State University Press.
This paper studies the welfare properties of the equilibrium timing of price changes. Staggered price setting has the advantage
that it permits rapid adjustment to firm-specific shocks, but the disadvantages that it causes unwanted fluctuations in relative
prices and that, by creating price level inertia, it can increase aggregate fluctuations. Because each firm ignores its contribution
to these problems, staggering can be a stable equilibrium even if it is highly inefficient. In addition, there can be multiple
equilibria in the timing of prices changes; indeed, whenever there is an inefficient staggered equilibrium, there is also
an efficient equilibrium with synchronized price setting.
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 by American Agricultural Economics Association
We present a new approach to study empirically the effect of the introduction of the euro on currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice depends on the characteristics of both the currency and the country. We use unique quarterly panel data of Norwegian imports from OECD countries for the 1996-2006 period. One of the key findings is that the eurozone countries in trade with Norway have substantially increased their share of home currency invoicing after the introduction of the euro. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The econometric analysis shows a significant effect of euro introduction above and beyond the determinants of currency invoicing (i.e., inflation rate, inflation volatility, foreign exchange market size, and product composition). However, the rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility.
Reviews the literature on exchange rate economics over the last two decades, with particular reference to recent developments. Topics surveyed include the evidence on foreign exchange market efficiency and forward discount bias, chewed interest parity and purchasing power parity, the theory and evidence relating to the determination of exchange rates (the flexible-price monetary model, the stickyprice monetary model, the equilibrium models and the portfolio balance model), recent work on the effectiveness of foreign exchange intervention, and the recent literature on exchange rate behavior within target zones. The emerging literature on foreign exchange market microstructure is also briefly discussed.
This paper describes a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction. It also establishes consistency of the estimated covariance matrix under fairly general conditions.
The relationship between cointegration and error correction models, first suggested by Granger, is here extended and used to develop estimation procedures, tests, and empirical examples. A vector of time series is said to be cointegrated with cointegrating vector a if each element is stationary only after differencing while linear combinations a8xt are themselves stationary. A representation theorem connects the moving average , autoregressive, and error correction representations for cointegrated systems. A simple but asymptotically efficient two-step estimator is proposed and applied. Tests for cointegration are suggested and examined by Monte Carlo simulation. A series of examples are presented. Copyright 1987 by The Econometric Society.
In the past fifteen years key exchange rates have moved in larger and more persistent ways than advocates of flexible rates in the late 1960s would have left anyone free to imagine. Certainly there was no expectation of constancy for nominal exchange rates. But real exchange rate movements of 30 or forty percent were definitely not suggested as a realistic possibility. Moreover where these large movements did occur they did not obviously appear to be connected with fundamentals, and hence seemed difficult to explain in terms of the exchange rate theories at hand. The persistence of rate movements was as surprising as the rapid unwinding of apparent misalignments when they did ultimately occur. The past fifteen years provide a natural dividing line between the Keynesian and monetary approaches of the 1960s, and the more recent analysis that takes into account exchange rate expectations and portfolio issues, which took off in the early 1970s as well as the brand-new approaches that concentrate on (partial equilibrium) microeconomics. To review these ideas the paper starts with a brief look at the U.S. experience with flexible exchange rates. From there it proceeds to the Mundell-Fleming model as a comprehensive framework of analysis. The following sections deal with persistent effects of policy disturbances, links between exchange rates and prices, the political economy of exchange rate movements and the question of policies toward excess capital mobility.
A natural generalization of the ARCH (Autoregressive Conditional Heteroskedastic) process introduced in Engle (1982) to allow for past conditional variances in the current conditional variance equation is proposed. Stationarity conditions and autocorrelation structure for this new class of parametric models are derived. Maximum likelihood estimation and testing are also considered. Finally an empirical example relating to the uncertainty of the inflation rate is presented.
A new procedure for statistical inference in cointegrating regressions is developed. The author introduces canonical cointegrating regressions (regressions formulated with the transformed data). The required transformations involve simple adjustments of the integrated processes using stationary components in cointegrating models. Canonical cointegrating regressions, therefore, represent the same cointegrating relationships as the original models. They are, however, constructed in such a way that the usual least squares procedure yields asymptotically efficient estimators and chi-square tests. The methodology presented here is applicable to a very wide class of cointegrating models, including models with deterministic and singular, as well as stochastic and regular, cointegrations. Copyright 1992 by The Econometric Society.
This paper is concerned with the estimation of covariance matrices in the presence of heteroskedasticity and autocorrelation of unknown forms. Currently available estimators that are designed for this context depend upon the choice of a lag truncation parameter and a weighting scheme. No results are available regarding the choice of lag truncation parameter for a fixed sample size, regarding data-dependent automatic lag truncation parameters, or regarding the choice of weighting scheme. This paper addresses these problems. Asymptotically optimal kernel/weighting scheme and bandwidth/lag truncation parameters are obtained. Using these results, data-dependent automatic bandwidth/lag truncation parameters are introduced. Copyright 1991 by The Econometric Society.