Assessing the effect of monetary policy on agricultural growth and food prices

https://doi.org/10.17221/295/2017-AGRICECONCitation:WAGAN Z.A., CHEN Z., HAKIMZADI S., SHAH M.S. (2018): Assessing the effect of monetary policy on agricultural growth and food prices. Agric. Econ. – Czech, 64: 499-507.
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Agricultural growth is closely associated with sustainable economic development. This is especially true from the perspective of developing countries, such as India and Pakistan, where significant portions of the labour force are dependent on agriculture for their livelihood. This study analysed the impact of macroeconomic policy (i.e. monetary policy) on employment, food inflation, and agricultural growth by analysing to what extent monetary policy is effective in controlling food price inflation, the effect of contractionary monetary policy on the agricultural sector’s employment and productivity, and the extent of monetary policy transmission to money market rates and 10-year interest rates. We did so by applying a factor-augmented vector autoregressive model proposed by Bernanke et al. (2005) to agricultural data from 1995 and 1996 to 2016 for India and Pakistan, respectively. We found that tight monetary policy significantly reduced food inflation and agricultural production while increasing the rural unemployment rate. Short-term and 10-year interest rates increased owing to the contractionary monetary policies pursued by both countries. An inclusive monetary policy whereby policymakers work alongside governments to achieve price stabilisation and reasonable employment rates is recommended.

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