Impact of Monetary and Macroeconomic Factors on Wheat Prices in Pakistan: Implications for Food Security
Keywords:
Wheat prices, co-integration, Pakistan.Abstract
This paper attempts to evaluate the impact of monetary and macroeconomic factors on real wheat prices in Pakistan for the period 1976-2010, using Johansen’s co-integration approach. The Augmented Dickey-Fuller test reveals that all the variables used are first-difference stationary, except the trade openness indicator, which is second-difference stationary. There is also a long-run equilibrium relationship among these variables. The results indicate that real money supply, openness of the economy, and the real exchange rate have a significant effect on real wheat prices in the long run. The impulse response function shows that a trade openness shock impacted wheat prices to some extent and that it took three to four years for prices to become stable, following the shock. The findings of the study suggest that the policy thrust should focus on increasing wheat supply in the country by enhancing production or by liberalizing trade. Efforts should also be directed toward stabilizing the value of the Pakistani rupee against foreign currencies, especially the US dollar.
References
Akbari, A.H., and Rankaduwa, W. (2005). Determinants of Inflation and Feasibility of Inflation Targeting in a Small Emerging Market Economy: The Case of Pakistan. Meeting of the Atlantic Canada Economics Association, Halifax, Nova Scotia.
Asfaha, T.A., and Jooste, A. (2007). The Effect of Monetary Changes on Relative Agricultural Prices. Agrekon, 46, 440-474.
Awokuse, T.O. (2005). Impact of Macroeconomic Policies on Agricultural Prices. Agricultural and Resource Economics Review, 34, 226-237.
Barnett, R.C., Bessler, D.A., and Thompson, R.L. (1983). The Money Supply and Nominal Agricultural Prices. American Journal of Agricultural Economics, 65, 303-307.
Cho, G., Kim, M., and Koo, W.W. (2005). Macro Effects on Agricultural Prices in Different Time Horizons. Meeting of the American Agricultural Economics Association, Providence, Rhode Island.
Dickey, D.A., and Fuller, W.A. (1981). Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root. Econometrica, 49, 1057-1072.
Dorfman, J.H., and Lastrapes, W.D. (1996). The Dynamic Responses of Crop and Livestock Prices to Money-Supply Shocks: A Bayesian Analysis using Long-Run Identifying Restrictions. American Journal of Agricultural Economics, 78, 530-541.
Ellis, L. (2001). Measuring the Real Exchange Rate: Pitfalls and Practicalities. Research Discussion Paper No. 2001-04, Reserve Bank of Australia.
Fuller, W. A. (1976). Introduction to Statistical Time Series. New York: John Wiley and Sons.
Government of Pakistan (2010). Pakistan Economic Survey, 2009-10. Islamabad: Finance Division, Economic Advisor’s Wing.
Greene, W.H. (2000). Econometric Analysis. New Jersey: Prentice-Hall, Inc.
Hallam, D., and Zanoli, R. (1993). Error Correction Models and Agricultural Supply Response. European Review of Agricultural Economics, 20, 151-166.
Holden, D., and Perman, R. (1994). Unit Roots and Cointegration for the Economist. In Rao, B.B (Ed.), Cointegration for the Applied Economist. New York: St. Martin's Press.
Husain, F., and Mahmood, T. (1998). Causality between Money and Prices: Evidence from Pakistan. Pakistan Development Review, 37, 1155-1161.
Hyder, Z., and Shah, S. (2004). Exchange Rate Pass-Through to Domestic Prices in Pakistan. Working Paper No. 5, Islamabad: State Bank of Pakistan.
Jabara, C.L., and Schwartz, N.E. (1987). Flexible Exchange Rates and Commodity Price Changes: The Case of Japan. American Journal of Agricultural Economics, 69, 580-590.
Johansen, S. (1988). Statistical Analysis of Cointegrating Vectors. Journal of Economic Dynamics and Control, 12, 231-254.
Kaabia, M.B., Gil, J.M., and Shebbi, H.E. (2005). Macroeconomics and Agriculture in Tunisia. 11th
Kargbo, J.M. (2000). Impacts of Monetary and Macroeconomic Factors on Food Prices in Eastern and Southern Africa. Applied Economics, 32, 1373-1389. Congress of the European Association of Agricultural Economists, Copenhagen, Denmark.
Kargbo, J. M. (2005). Impacts of Monetary and Macroeconomic Factors on Food Prices in West Africa. Agrekon, 44, 205-224.
Khan, M. S., and Schimmelpfennig, A. (2006). Inflation in Pakistan: Money or Wheat? (Research Bulletin 2). Islamabad: State Bank of Pakistan.
Khan, A.H., and Qasim, M.A. (1996). Inflation in Pakistan Revisited. Pakistan Development Review, 35, 747-759.
Lapp, J. S., & Smith, V. H. (1992). Aggregate Sources of Relative Price Variability among Agricultural Commodities. American Journal of Agricultural Economics, 74, 1-9.
Lutkepohl, H. (1993). Introduction to Multiple Time Series Analysis. 2nd
Mushtaq, K., and Dawson, P. J. (2002). Acreage Response in Pakistan: A Cointegration Approach. Agricultural Economics, 27, 111-121. ed. New York: Springer-Verlag.
Niaz, S. (1995). Pricing of Farm Produce in Pakistan: Objectives, Practices and Experiences. Islamabad: Print Associates International.
Orden, D., and Fackler, P.L. (1989). Identifying Monetary Impacts on Agricultural Prices in VAR Models. American Journal of Agricultural Economics, 71, 495-502.
Pesaran, M.H., and Pesaran, B. (1987). Working with Microfit 4.0: Interactive Econometric Analysis. Oxford University Press.
Pesaran, M. H., Shin, Y., and Smith, R. J. (2000). Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables. Journal of Econometrics, 97 (2), 293-343.
Qayyum, A. (2006). Money, Inflation, and Growth in Pakistan. Pakistan Development Review, 45, 203-212.
Robertson, J.C., and Orden, D. (1990). Monetary Impacts on Prices in the Short and Long Run: Some Evidence from New Zealand. American Journal of Agricultural Economics, 72, 160-171.
Sephton, P.S. (1992). Modelling the Link between Commodity Prices and Exchange Rates: The Tale of Daily Data. Canadian Journal of Economics (Revue canadienne d'Economique), 25, 156-171.
Sims, C. A. (1980). Macroeconomics and Reality. Econometrica, 48, 1-49.
Taylor, J.S., and Spriggs, J. (1989). Effects of the Monetary Macro-Economy on Canadian Agricultural Prices. Canadian Journal of Economics (Revue canadienne d'Economique), 22, 278-289.
