AN ECONOMIC ANALYSIS OF THE IMPACTS OF MONETARY POLICY ON SOUTH AFRICAN AGRICULTURE

V. Y. Dushmanitch and M. A. G. Darroch

Agrekon, 1990, vol. 29, issue 4

Abstract: Following world wide trends, closer integration of agriculture into the macroeconomy has exposed farmers to the effects of changes in interest rates, exchange rates and prices that are associated with changes in monetary policy. In South Africa, farmers are faced with persistently high innation, nuctuating interest rates and declining rand exchange rate. A general equilibrium simultaneous equation model was constructed to analyse the impacts of monetary policy on South African agriculture. Annual data (1960-1987) were used to estimate equations representing the field crop, horticultural, livestock and manufacturing sectors, and the money and foreign exchange markets. The interest, innation, and exchange rates were determined endogenously and key macrolinkages whereby the impacts of monetary policy are transmitted to agriculture were simulated. Due to insufficient degrees of freedom, the model was estimated by two-stage principal components. The estimated model was used to simulate the dynamic impacts of an expansionary monetary policy on agriculture. In the short run. this causes the real interest rate to fall, exchange rate lo depreciate, and general level of prices to rise. Depreciation of the exd1ange rate and higher domestic innation raise input prices. Increased cost effects of higher input prices outweigh the reduced cost effects of lower real interest rates causing real field crop and horticultural supply to decrease. Increased stock effects of lower real interest rates and increased cost effects of higher input costs impact negatively on livestock supply. The resultant decrease in agricultural supply causes commodity prices to rise which lowers real demand for agricultural products. The net effect is a decline in real agricultural income for the sectors modeled.

Keywords: Agricultural and Food Policy; Financial Economics (search for similar items in EconPapers)
Date: 1990
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:agreko:267321

DOI: 10.22004/ag.econ.267321

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