David Orden

Identifying Monetary Impacts on Agricultural Prices in VAR Models

Since the mid-1970s, a number of studies have used vector autoregressive (VAR) models to evaluate the magnitude and timing of macroeconomic impacts on agriculture. Use of the VAR method has been viewed as a way to obtain empirical evidence about these impacts that might not emerge from more traditional overidentified and less dynamic econometric models. The hope has been that by placing minimal restrictions on VAR models, the true structure of the economic relationships under investigation can be observed. While the aim is laudable, critics of VAR models have argued that it has had the unfortunate consequence of obscuring some important structural identification issues and seeming to promise that something can be obtained for nothing (Cooley and Leroy, Leamer). They point out that identifying restrictions are required to give economically interpretable meaning to the results of any simultaneous equation model (SEM). In standard practice, identification of VAR models is obtained implicitly by choice of a Choleski decomposition of the covariance matrix of one-step-ahead forecast errors, which is equivalent to imposing a recursive structure for the economy. Of concern is that the recursive structure may not be believable. Further, as Bernanke has observed, examination of ad hoc variants of the recursive order implies a strange set of prior beliefs in which the analyst holds strongly that the system is recursive but is not sure in what order the variables should be arranged. In response to these concerns, several recent papers have pointed out that identification of VAR models does not have to rely on the assumption that the contemporaneous structure is recursive (Bernanke, Sims). Rather, the distinguishing features of a VAR model are, first, that identification rests on the assumption that distinct, mutually orthogonal behavior shocks drive the economy, and, second, that lagged relationships among the endogenous and exogenous variables (if any) are left entirely unrestricted. Given these features, a VAR model must be identified solely by restrictions placed on the contemporaneous interactions among the variables, but the identifying restrictions do not have to preclude simultaneity. In this paper, we elaborate on the structural interpretation of VAR models and use this analysis to examine monetary impacts on agricultural prices. We discuss the identification problem and the implications of a recursive structure. We illustrate our points with respect to the three-variable model of money, industrial prices, and agricultural prices that has been used in several articles to evaluate the effects of monetary shocks on price dynamics (Bessler, Devadoss and Meyers). We then introduce a somewhat richer behavioral model of the macroeconomy and its effects. A simultaneous model is shown to offer a more believable identification of monetary policy and other macroeconomic shocks than a recursive model, and monetary impacts on agricultural prices are assessed.

Monetary Impacts on Prices in the Short and Long Run: Some Evidence from New Zealand

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.

Financial Deregulation and the Dynamics of Money, Prices, and Output in New Zealand and Australia

Effects of financial deregulation in the 1980s on the dynamic interactions among money, prices and output in New Zealand and Australia are evaluated. Prior to deregulation, the series appear to be nonstationary and cointegrated based on Johansens maximum-likelihood tests, with money proportional to prices but less than proportional to output in the long run. The series also appear cointegrated in New Zealand through the 1980s when the effects of deregulation are accounted for with a deterministic shift parameter. The cointegrating coefficients are similar for the pre-liberalization and full-sample periods, and dynamic responses are evaluated for error-correction models incorporating the estimated long-run relationships. Copyright 1993 by Ohio State University Press.

Avocado Pests and Avocado Trade

This article evaluates the effects of a November 2004 phytosanitary rule that removed seasonal and geographic restrictions on the importation of fresh Hass avocados from approved orchards in Mexico to the United States. With the remaining systems approach compliance measures in place, pest risks do not substantially increase and U.S. net welfare rises by

More or Less Ambition in the Doha Round: Winners and Losers from Trade Liberalisation with a Development Perspective

77 million. Removal of remaining compliance measures may lead to lower net welfare gains depending on which measures are eliminated and the estimated probabilities of pest infestations. Copyright 2008, Oxford University Press.

Exchange Rate Effects on Agricultural Trade

What is at stake in the standoff and suspension of the Doha Round of trade talks? What impact would an agreement based on greater or lesser levels of ambition have on developing countries, whose economies are relatively dependent on agriculture? Using the MIRAGE computable general equilibrium model of the global economy, in this article we compare different scenarios for the Doha agricultural and NAMA negotiations, taking real numbers from the proposals on the table from the United States (US) and the European Union (EU) in December 2005. The results for both scenarios demonstrate the high stakes for successful completion of this negotiation given the positions articulated by the countries involved. A cooperative reform outcome by the US and the EU - based on the most ambitious components of their negotiating proposals - delivers noticeably more benefits than an unambitious outcome. We measure the degree of ambition in each scenario by the construction of a Mercantilist Trade Restrictiveness Index and focus the analysis on the impacts on developing countries. Copyright 2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd .

Macroeconomic Imbalances: A Multiregional General Equilibrium Analysis

With sustained appreciation of the U.S. dollar over the past 4 years, the exchange rate has again taken on importance for agriculture. This overview paper revisits the analysis of exchange rate impacts, reviewing the relevant conceptual arguments, summarizing the evidence economists and agricultural economists have marshaled from the 1970s and the 1980s and from several more recent papers, presenting some illustrative recent empirical analysis of exchange rate effects, and briefly examining the detrimental consequences that sustained appreciation of the dollar is having on U.S. farm policy.

Comparison of Box--Tiao and Johansen canonical estimators of cointegrating vectors in VEC(1) models

This article analyzes regional and sectoral consequences of recent federal budget and trade deficits. A multiregional computable general equilibrium (MCGE) model is developed in which regions differ in technology, factor endowments, tax rates, government expenditure patterns, and trade relationships. An application to Virginia and the rest-of-the-United States indicates that traditional sectors (agriculture, forestry, basic wood products, mining, textiles, and apparel) bear a greater burden of adjustment to macroeconomic imbalances than do other sectors. The analysis demonstrates that seemingly aspatial national policies may shift the geographic distribution of national output and income.

Long-Run Identifying Restrictions for an Error-Correction Model of New Zealand Money, Prices and Output

Abstract The Box—Tiao (1977) and Johansen (1988) approaches to estimating cointegrating vectors are compared and small-sample properties of the estimators are evaluated in Monte Carlo experiments for bivariate first-order models. In models without drift, the distributions of the Box—Tiao estimator are found to be less dispersed and leptokurtic in a variety of interesting cases. The presence of drift induces asymptotic normality in both estimators and again the distributions of the Box—Tiao estimator are often less dispersed in small samples.

Sources of Growth in French Agriculture

Abstract Dynamic interactions among money, prices and output are modeled for New Zealand. We find evidence of one cointegrating relationship and two stochastic trends among these series and base structural inferences on long-run identifying restrictions of the type proposed for VEC models by King, Plosser, Stock and Watson (KPSW). Under the assumption that a monetary shock has no effect on output in the long-run, a productivity shock for which there is partial monetary accommodation explains most of the variability of output at all forecast horizons, whereas the monetary shock is the most important determinant of levels of money and prices. An alternative identifying restriction that imposes a long-run impact of a monetary shock on output results in less plausible dynamic effects.