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

Abstract

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.

<p>Assessing the Effect of Monetary Policy on the Competitiveness of Agricultural Enterprises</p>

“…Integrating the regression model findings with specific details from the literature review deepens our understanding on how monetary policy impacts agricultural enterprises, drawing on theoretical insights and empirical data to offer a nuanced picture. The significant negative relationship between repo rates and agricultural revenues, as indicated by a p-value less than 0.0001 for the repo rate coefficient, aligns with literature assertions [1,4] that higher interest rates will elevate financing costs, consequently dampening investments and economic activities within sectors like agriculture. This is particularly evident in our findings, where higher rates in the previous year have a discernible dampening effect on agricultural revenues.…”

“…According to economic theory, monetary policy has a significant impact on the competitiveness of agricultural enterprises, both within a specific country and in the global market. Competitiveness, defined as the ability of enterprises to achieve sustained market presence, profitability, and growth in the face of competitive forces, is influenced significantly by factors such as interest rates, inflation, and exchange rates, which are controlled by monetary policy [1] . In this study, the competitiveness of agricultural enterprises was measured through the lens of revenues.…”

“…On the other hand, low inflation can support the stability of agricultural product prices and the sustainability of the sector. The restrictive monetary policies in the U.S. have adverse effects on the agricultural sector, such as increased interest rates, reduced agricultural trade and higher prices [1] . There are many scientific works that deal with the effects of monetary policy on the competitiveness of enterprises.…”

Global agricultural prices and policies during WTO regime: Explorative research to price policy advocacy

“…Tight monetary policy significantly reduced food inflation and agricultural production while increasing the rural unemployment rate. Reasonable employment rates must be recommended to achieve price stabilization by an inclusive monetary policy in developing countries such as India (Wagan et al., 2018).…”

Monetary Policy and Agricultural Sector Performance in Nigeria: A Granger Causality Approach

“…Similar studies have been conducted in this all-important area of research. Examples include the impact of monetary policy on agricultural development in Nigeria by Ehinomen & Charles (2012) using data from 1970 to 2010, impact of the monetary policy factors on the foreign direct investments in Romania by Magdalena et al (2012), monetary policy actions and agricultural sector outcomes: empirical evidence from south Africa by Muroyiwa & Sibanda (2014), effect of monetary policy on agricultural sector in Nigeria from 1970 to 2010 by Udeaja & Udoh (2014), the impact of monetary policy on the economic growth of Nigeria by Nwoko et al (2016), assessing the effect of monetary policy on agricultural growth and food prices by Wagan et al (2018) and impact of broad money supply and exchange rate on agricultural gross domestic production by (Ogbanje & Ihemezie, 2021). None of these studies examined the direction of relationship between monetary policy and agricultural sector performance in the short-run.…”