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ABSTRACT
The present study was conducted at Applied Economics Research Centre,
University of Karachi, Pakistan during 2008. This study empirically investigates
the cointegration and causal relationship between agricultural prices and
money supply during a period 1971 to 2007. For empirical analysis JJ
cointegration for long run and Toda Yamamoto Modified Granger Causality Test
for causal association were used. The results show that a long run relationship
existed between both variables and long run elasticity of agricultural prices
with respect to money supply is 0.79. The causality analysis indicates
unidirectional causality from money supply to agricultural prices. Thus money
supply is not neutral in determining agriculture prices in an agricultural based
economy of Pakistan.
INTRODUCTION
Agriculture sector plays a vital role in the process of economic growth of the
country. It contributed 21.5 percent to GDP during 2008. For desirable
economic growth sustainability in agricultural growth is necessary (6).
Agricultural prices are important for maintaining agricultural growth, farmer’s
living standard and investment decisions. Thus factors that influence the
agricultural prices is a fundamental issue. Conventional agricultural
economies examine that agricultural prices are determined by the interaction
of supply and demand forces. The latest studies on agricultural economies
examined that macroeconomics, particularly monetary factors, affect the
agricultural prices. Tweeten (12) finds that monetary shocks have a little
effect on agricultural prices. David et.al. (2) empirically indicates
unidirectional causality from money supply to agricultural prices in Brazilian
data. Frankel (5) argues that monetary policy has significant effects on
*M. Phil Student, Applied Economics Research Centre, University of Karachi, Karachi,
Pakistan.
METHODOLOGY
The study covers quarterly data from 1971 to 2007 phase. Broad money
supply (M2) (measured in million of rupees) was taken from international
financial statistics and agricultural price index (quarterly) developed by
author. Both series were transformed in natural logarithm for econometric
analysis.
This empirical work uses Phillips and Perron (9) unit root test to determine
time series properties. Phillips and Perron (PP) test proposes an alternative
(non-parametric) method of controlling for serial correlation while testing unit
root of time series data. PP method estimates non-augmented Dickey Fuller
equation (1). The test detects the presence of a unit root in a series, say Xt by
estimating as
∆X t = α + ρ X t −1 + ε t − − − − − − − (1 )
1
~ γ 2
T ( f 0 − γ 0 )( se( ρ~ ))
tρ = t ρ 0 − 1
− − − − − − − (2)
f0 2 f0 2 s
(T − k ) s 2
γ0 = − − − − − − − (3)
T
JJ cointegration test
y t = A1 y t −1 + ⋅ ⋅ ⋅ ⋅ ⋅ ⋅ ⋅ + A ρ y t − ρ + Bx t + ε t − − − − − − − ( 4 )
where
Π = ∑ i
A i − I , i = 1 , ⋅ ⋅ ⋅ ⋅ ⋅ ⋅ ⋅, ρ
Γ i = − ∑
j = r + 1
A i − − − − − − − (6 )
series in the model, and to intentionally over fit the causality test underlying
model with additional d-max lags- so that VAR order is now ρ = k + d , where
k is the optimal lag order.
Toda and Yamamoto (11) augmented Granger causality test was obtained in
present study by estimating a two equation system using the seemingly
unrelated regressions (SUR) techniques. Therefore, model can be specified
as follow:-
k +d k +d
Ln( AP ) = ∑ α 1i Ln( AP ) t −i + ∑ β 1i Ln ( MS ) t −i + µ1t − − − − − (7)
i =1 i =1
k +d k +d
Ln ( MS ) = ∑ α 21i Ln( MS ) t −i + ∑ β 2i Ln( AP ) t −i + µ 2t − − − − − (8)
i =1 i =1
where Ln(MS) and Ln(AP) are respectively the natural logarithms of money
supply and natural logarithms of agricultural prices. ‘ k ’ is the optimal lag
order, d is the maximal order of integration of series in system and µ1 and µ 2
are error terms that are assumed to be white noise. Conventional Wald tests
were then applied to first k coefficient matrices using standard χ 2 -statistics.
The main hypothesis set can be drawn as in equation (7), money supply
“Granger-causes” agricultural prices if it is not true that β1i = 0∀i ≤ k ; in
equation (8), agricultural prices “Granger-causes” money supply if it is no true
that β 2i = 0∀i ≤ k .
RESULTS AND DISCUSSION
The results about the order of integration of series, derived from Phillips and
Perron (PP) unit root test (Table-1.) indicate that natural logarithms of
agricultural prices and natural logarithms of money supply are not stationary
in their levels. But stationary after first difference of both variables, the null
hypothesis of no unit root is rejected at 0.01 significance level.
The results of causality wald test, obtained from SUR estimations are
illustrated in Table- 4. Null hypothesis that money supply does not cause
agricultural prices can be rejected at 10 percent level of significance. On the
other hand, hypothesis that agricultural prices do not cause money supply,
cannot be rejected at 10 percent level of significance. Thus, there is
unidirectional causality from money supply to agricultural prices in case of
Pakistan’s economy.
CONCLUSION
The study concludes; first, there is one cointegrated vector between money
supply and agricultural prices. Secondly, estimated cointegrated vector
indicates 0.79 long run elasticity of agricultural prices with respect to money
supply. Thirdly, causal analysis demonstrates that there is unidirectional
causality from money supply to agricultural prices. Present findings guide to
policy implication that in long run money supply positively causes agricultural
prices. This implies that loose monetary policy can be used to boost the
agricultural prices which leads to an increase in farmer’s income or to use
tight monetary policy in order to control agricultural prices for easing
consumers. This study also recommends that closed managed coordination
is necessary between monetary, agricultural policy makers and price control
authority to achieve desired goals to facilitate consumers or farmers.
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