An economic analysis of the impacts of monetary policy on South African agriculture.

Abstract

A general equilibrium, simultaneous equations model was constructed to analyse the impacts of monetary policy on South African agriculture via the interest rate, exchange rate, inflation and real income. 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 rate, general price level and exchange rate were determined endogenously to capture the effects of monetary policy on these variables. Macrolinkages whereby the impacts of monetary policy are transmitted to agriculture were simulated. Due to insufficient degrees of freedom, the final model was estimated by two-stage principal components. Dynamic simulations of an expansionary monetary policy suggest that such policy action has important implications for South African agriculture. In the short run, an increase in money supply causes the real interest rate to fall, general price level to rise and exchange rate to depreciate. Depreciation of the exchange rate and higher domestic inflation 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. Stock effects of lower real interest rates and cost effects of higher input costs impact negatively on livestock supply. The resultant decrease in real agricultural supply causes product prices to rise which lowers real per capita quantiy demanded for agricultural products. The net effect is a decline in total real gross farm income for the sectors modelled. Dynamic simulations of the separate impacts of changes in the interest rate, general price level and exchange rate on agriculture support these conclusions. Inflationary impacts of monetary policy changes were larger than interest rate and exchange rate impacts, which were generally similar in magnitude.