Monetary policy, Farm sector income and Farm Household Well-being --a VECM Analysis

Chen Gao and David Leatham ()

No 252815, 2017 Annual Meeting, February 4-7, 2017, Mobile, Alabama from Southern Agricultural Economics Association

Abstract: Farm sector seems to be countercyclical to the household well-being and general economy. In recent years the farm sector is experiencing downtrend with net farm income significantly drops from 2013 high. On the other hand, average farm household income keeps booming, even has higher growth rates than average U.S. household income. Considering the whole economy fully recovered, Federal Reserve started to hike interest rate in 2015. This paper aims to address the linkage and equilibrium among farm sector income, farm household well-being and macroeconomic monetary policies empirically. By using Vector Error Correction Model (VECM), we show both the ratio of average farm household income to U.S. household income and the off-farm earnings of farm household are cointegrated with CPI. Farm portion of farm household income, although strongly positive correlated with farm sector net income, is not cointegrated with either CPI or farm sector net income. Towards sector level analysis, farm sector net income, Federal Funds Rate (FFR) and CPI are proved to be all cointegrated. CPI is dominating the decision of FFR and further affecting net farm income. Combining our results from household level and sector level, a jump in FFR can lead to slower pace of CPI and farm sector net income, then dragging down the ratio of average farm household income to U.S. household income and the off-farm earnings. In the next few years with FFR goes up, we expect farm sector income will keep in relatively low level and farm household may suffer from reduced off-farm earnings. Related farm supporting policies are then discussed conceptually.

Keywords: Agribusiness; Agricultural and Food Policy; Agricultural Finance; Community/Rural/Urban Development; Financial Economics (search for similar items in EconPapers)
Pages: 22
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:ags:saea17:252815

DOI: 10.22004/ag.econ.252815

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