International monetary and exchange rate policies and world agricultural markets: the case of soybeans and soybean products

Taleb Mohammad Awad

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The main objective of the study is to quantitatively evaluate the effects of a monetary policy change by a given country on the world soybean and products markets. A system of bilateral exchange rate equations is incorporated into a multi-country nonspatial price equilibrium model of world soybean and products markets. The bilateral exchange rate equations are based on a stock-flow approach to exchange rate determination and do not require either the purchasing power parity nor the interest parity conditions to hold. In addition, exchange rate expectations are endogenized in the model using an extrapolative, quasi-rational approach. The regional soybean, soymeal, and soyoil submodels are linked through price transmission equations and trade flow identities;The model is estimated using a nonlinear, two-stage least squares estimator. A set of dynamic simulations of a change in U.S. monetary policy are conducted. The simulations account for the effects of monetary policy on the general price levels in each country as well as the joint product effects. In the dynamic simulations, a one percent, sustained increase in the growth rate of U.S. money supply (M1) was simulated over the period of flexible exchange rates (1971-1982);The dynamic policy simulation analysis provides strong evidence of a significant impact of a change in U.S. monetary policy on the U.S. and world soybean and products markets over the long run. The simulated expansion in the growth rate of U.S. money supply resulted in higher real prices and exports of soybeans and joint products in the U.S., lower real prices and higher imports of soybeans and products in importing countries, and lower real prices and exports of soybeans and products by U.S. export competitors. Furthermore, the monetary effects tended to be larger for the joint products (soymeal and soyoil) than for the primary product (soybeans) in all trading countries. Ignoring the global inflationary adjustments to a U.S. monetary policy change tends to over-estimate the impacts of monetary policy on U.S. markets over time. Finally, the study provides strong evidence that ignoring the simultaneous interaction of a primary commodity and its joint products tends to seriously overestimate the effects of a change in monetary policy on the primary commodity and to underestimate the effects on the joint products.

Date: 1987-01-01
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