Monetary Policy Impacts
on U.S. Livestock-Oriented
During the last decade there have been numerous theoretical and empirical estimates of the effects of macroeconomic variables on agricultural prices. These analyses have progressively improved due to theoretical refinements (Rausser, et al.; Andrews and Rausser; Frankel; Batten and Belongia; Chambers; Chambers and Just; Barnett, Bessler, and Thompson; Bessler; Devadoss and Meyers; Orden and Fackler; Robertson and Orden; Dorfman and Lastrapes; Lai, Hu, and Wang; Saghaian, Reed, and Marchant; and Saghaian, Hasan, and Reed) and more powerful time series techniques (vector autoregressive and vector error correction models) that provide better adjustments for non-stationarity and long run relationships among variables (Schmit; and Crane and Nourzad). The potential overshooting of agricultural prices has always been a main focus, yet the results have differed, among other reasons, because of different conceptualizations, econometric techniques, and variable definitions.
In this article we use vector error correction models to investigate the impacts of changing macroeconomic variables on individual agricultural commodity prices. Saghaian, Reed, and Marchant used some of these techniques for aggregate commodity prices. They found that aggregate commodity prices overshoot their long-run equilibrium when the money supply changes. Their model predicts that less-traded commodities and commodities whose demand is more interest rate sensitive will have higher degrees of overshooting. We also hypothesize in this article that product characteristics, market structure, and the biological nature of production influence overshooting and the time it takes individual agricultural commodity prices to meet their steady state. This article tests these hypotheses using individual grain and livestock prices, specifically examining whether grains (input) prices overshoot more than livestock (output) prices. We also study whether differing measures of monetary policy change the overshooting results and whether the use of real or nominal prices affects the empirical results. These results should help settle the questions about the appropriate definitions for these variables.
This paper is published in the Progress in Economic Research, Volume 9. Nova Science Publishers, Inc., Hauppauge, NY. 45-62.