Agric. sci. dev., Vol(3), No (11), November, 2014. pp.

370-374

TI Journals

ISSN:

Agriculture Science Developments

2306-7527

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Copyright 2014. All rights reserved for TI Journals.

Analysis of the Macroeconomic Variables Effect on the Agricultural

Sector
Rose Hashemi *
M. A. in Agricultural Economics, Qaemshahr Branch, Islamic Azad University, Qaemshahr, Iran.
*Corresponding author: rose.hashemi@ymail.com

Keywords

Abstract

Agricultural prices and employment

Macroeconomic variables
VAR model
Causality test

In this study the impact of macroeconomic variables such as exchange rates, inflation and monetary
aggregates is reviewed on important variables in agriculture such as prices and employment during 19812011. For this purpose, the model vector Auto Regression (VAR) was used. The results showed that longterm relationship between the variables is confirmed through Johansson convergence tests. According to the
VAR instantaneous reaction model, an inflationary shock to the economy of Iran can have significant and
positive effect on the price of four courses, especially in the first period, but the effect on employment is not
significant. Employment variable response and monetary aggregates diagram indicates that the monetary
aggregates shock has an increasing effect on employment. In other words with the economic Expense
Liquidity growth It can be expected that this positive growth effect continues on agricultural employment for
several periods. Of course according to the diagram this shock is almost ineffective during the first two
periods.

1.

Introduction

The need for agricultural machinery tools has played an important role in the industry development and also exchange of products in the
development of the service sector. Although after the Industrial Revolution and the gradual elimination of the political -economic feudal system
the industry sector and investment factors were more important in manufacturing but still this section is referred to as the axis of economic
growth and development. The relatively high use of the agricultural sector compared to other sectors of industry and therefore the employment
ability, possibility of earning foreign currency money through exports and reduce using money for imports of foreign agricultural products by
increasing domestic production, strategic products of this sector, providing some of the data needed to especially for industry and services
sectors, as well as a market for the output of other sectors are the reasons for the importance of agriculture in the national economy.
Emami ant et.al (2012) in their research of evaluation of the output gap and its impact on inflation in economy of Iran estimate the output gap as
one of the variables affecting inflation in Iran. Research results confirmed the views of New Keynes. Therefore, the average inflation rate in Iran
during the study period is 19.6 and is considered among the countries with high inflation rates, the long term Philips curve indicates that
according to Keynes view if the increase demand shock occurs, this shock increases the product too. And compared to new classics mode this
shock has less effect on inflation [7]. Rabiee and colleagues (2011) examined the effects of short-and long-term changes in macroeconomic
variables. The results of model evaluation showed that there is long-term equilibrium relationship between selected macroeconomic variables
and agricultural income. Interest rates and exchange rates in the short and long term, respectively has negative and positive relationship with
agriculture income which is expected theoretically. Also prices of agricultural crops and liquidity in the long term had negative effects, but in the
short term had a positive effect on agricultural income. Furthermore, the findings stated that the subsidy granted to this sector did not have a
significant effect on farmers' incomes [12]. DadrasMoghaddam et al (2009) investigated the relationship between macroeconomic variables and
the agricultural sector (with emphasis on monetary policy), the results show that changes in macroeconomic variables affect the agricultural
sector, but the reverse is not true[5]. Hajian et al (2007) in their study of the impact of monetary and fiscal policies such as added value, export,
price and investment on the main variables of agricultural in Iran used time-series analysis of the (VAR). The results showed that the impact of
monetary policy on added value, price and export in Agriculture sector is positive and effect of investment in this sector is negative[8].
Moghaddasi and Yazdani (2000),evaluated the relationship between the main variables of economic in agricultural sector and monetary and
financial policy using a VAR model for the period 1997-1971; and concluded that Effects of monetary and fiscal policies on the added value,
prices and agricultural exports is positive and effect on investment is negative[10].

2.

Materials and Methods

When we examine the multi-variables time series behavior, it`s important to notice the interactions of these variables in terms of a simultaneous
equation system. If the equations of this model include variables, commonly it is called a dynamic system of simultaneous equations. Assume
that the relationship between two variables of time series is investigated. The VAR model is like the following (1) and (2) when each of these
variables appears to have an interrupt in the model:

The matrix of the VAR model is as equation (3):

yt = 1yt-1 + 1xt-1 + u1t

( 1)

xt = 2 yt-1 + 2 xt-1 + u2t

( 2)

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Analysis of the Macroeconomic Variables Effect on the Agricultural Sector

Agriculture Science Developments Vol(3), No (11), November, 2014.

yt
x
t

1

2

1 y t 1
2 x t 1

yt

xt

1 1L 1L u1t

2L 1 2L2 u2t

1L y t
1 1L
L 1 L x

2
2 2 t

yt
x
t

u1t
u
2t

u1t
u
2t

1L u1t
1 1 L2
L
1 1L u 2t
2

(3)

(4)

(5)

(6)

(1 1L )(1 2L ) (2L )( 1L ) 1 (1 2 )L (12 12 )L2

(7)

y t u1t 1u1,t 1 (12 12 )u1,t 2 ... 1u2,t 1 1(1 2 )u2,t 2...

(8)

Function (8) is known as the stimulate reaction function and the change effects of now and with interrupt; u1t and u2t shows over time on X and
Y. usually when a VAR model is estimated, it is not expected that all the interruption coefficients be significant but it might be significant based
on F statistic. In VAR model one of the main issues is to determine the optimum lag of variables for this purpose, the Akaike- Schwarz-Bayesian
criteria is used. One of the benefits of VAR model is that it has a very simple method. It can be estimated by OLS method and forecasts provided
by this model are better than other simultaneous equations models [8].
Unfortunately one of the weaknesses of the VAR model is that the estimated result analytically does not have any use. One of the methods of
variable connection analysis in VAR model is using the IRF (Immediate reaction). This diagram shows the impact of a shock or shakes in a
variable on other variables, In other words if a shake occurs in one variable in a period, what will be its effect on variable or other variable in
next periods.

3.

Results and Discussion

Stability and convergence tests

Regarding the information of this study are time series, therefore the first step before estimating the VAR model is checking the static variables
this is done by Dickey - Fuller added unit root test and the results are in Table (1). As is seen from this table, the Dickey Fuller statistic
amounts in terms of absolute value are bigger than critical price values for all 3 products in market and so all variables are static in first
subtraction.
Table 1. Unitroot testfor determiningthe staticvariables ofstudy
Variable
Exchange rate
(ER)
Monetary aggregates
(MO)
Inflation
(IF)
Agriculturalprices
(PG)
Agricultural
employment ) LG(
Source: Research findings

Significance level
1%
5%
10%
1%
5%
10%
1%
5%
10%
1%
5%
10%
1%
5%
% 10

Critical values
-3.78
-3.01
-2.64
-3.78
-3.01
-2.64
-3.78
-3.01
-2.64
-3.78
-3.01
-2.64
-3.78
-3.01
-2.64

T-statistics in level of data

T-statistics on the subtraction of the first order

0.863

-2.98

-2.50

-3.38

-2.63

-4.81

0.711

3.71

-2.12

-6.20

Static rank
I(1)

I(1)

I(1)

I(1)

I(1)

Rose Hashemi *

372

Agriculture Science Developments Vol(3), No (11), November, 2014.

In accordance with the findings of the table the overall test results indicate that all the variables are static in first stage. Because all of the
cumulative time (dependent) variables are grade 1 (I1) and are not in static level so to evaluate the existence of long term relationship and
regression the remaining values should be tested if they are static and the cumulative time (dependent) relationship confirmed the regression will
be correct. According to table 2 the result of Convergence test using Johnson Convergence test showed that the relationship between variables is
confirmed in 5% level and therefore there is long term relationship between variables.
Table 2. JohanssonConvergencetestresults
Test results
Rejectthe null hypothesisand
confirmConvergenceoflongtermequilibriumrelationship

prob
./000

% Critical value of level5

69.81

Trace Statistic
107.69

Null hypothesis
Lack ofconvergence between
thevariables.

Source: Research findings

Estimating the VAR model

As already mentioned, in order to examine the relationship between macroeconomic variables and prices and agricultural employment, the VAR
model is used. In this model, all variables are assumed endogenous variables and one variable is derived from values with its interruption and
other variables. Therefore, the first step in estimating the model is determining the optimum lags of variables in order to get this the indexes are
used such as Akaike, Bayesian Schwartz- and Hannah Queen. In this study, we determined the optimal lag using eviews software the results
are in Tables (3) and (4). As seen in this table In first and second equation of relationship between macroeconomic variables and price indexes
and agricultural employment indexes; the optimal lag is 1 because in this lag the interested indexes has the least values.
Table 3. Optimal lag of VAR model for macroeconomic variables and agricultural prices
Hannah-Quinn
58.56
51.87*
52.60

Schwartz
58.72
52.67*
54.04

Akaike
58. 52
51.68*
52. 25

Lag
0
1
2

Source: Research findings

Table 4. Optimal lag VAR model for macroeconomic variables and agricultural employment
Hannah-Quinn
66.61
67.62*
68.63

Schwartz
66. 77
63.47*
65. 12

Akaike
66. 57
62.47*
63. 33

Lag
0
1
2

Source: Research findings

After determining the optimal lags, the VAR model was estimated to assess the association between variables. As already mentioned it is
difficult to interpret the estimated coefficients of the model and is not very suitable for policy analysis. To solve this problem impulse response
function is used in VAR models. This function is the effect of the endogenous variable reaction to a change (shock or trigger) of another variable
over time. In this research the shock effect on macroeconomic variables on two agricultural variables (employment and price) are estimated and
orderly shown in conclusion.
Figure (1) shows the reaction of price against macroeconomic variables of exchange rates, inflation, and the amount of money. As it`s seen in
the figure the created shock on exchange rate has positive effect on price but it`s not significant and with one shock in exchange rate in the first 5
periods, its effect is almost smooth and the same but from this period onward, the effects of this shocks on price increases.
About the effect of inflation on the price based on figure 1 it can be realized that variable effect was increasing and positive during 10 periods
however this effect was significant in 4 of the first period but then it was not significant. This result showed that inflationary shocks in economy
can have positive and significant effect on price in order to increase it.
Also, the effect of the volume of money variable on the agriculture price the results of Impulse response function shows that this variable also
has a positive effect on agricultural prices. However, Shock Effect in monetary amount is high in the first to third periods but gradually
decreases and the effect is reduced.
Figure (2) shows employment response against shocks to macroeconomic variables. As can be seen from this figure the exchange rate shock in
10 periods is not a fixed process. Its effect was increasing till the 4th period but after that it was decreasing. However, this effect is not
significant in any period. About exchange rate effect on employment the figure 2 of impulse response shows that the shock in economy inflation
has negative effect on employment in 3 periods also the effect is Ascending in all periods. However, like the exchange rate; the effect of
inflation on employment is not statistically significant. The figure of employment response against monetary amount shows that the shock in
monetary amount has increasing effect in 10 periods in other words with the economic Expense Liquidity growth It can be expected that this
positive growth effect continues on agricultural employment for several periods. Of course according to the diagram this shock is almost
ineffective during the first two periods.

4.

Conclusions
1.
2.
3.
4.
5.

Convergence test results using Johansson test showed that the Convergence relationship between the model variables is approved at
5%, and thus long-term relationship between the variables exists.
Generated inflation shock to the economy could have significant and positive effect on the agricultural prices in 4 periods in order to
increase it.
The response employment figure against money volume show that the shock in monetary amount has increasing effect in 10 periods.
The findings show that as expected, the volume of money is affecting on agricultural prices.
The rate of inflation as the volume of money has significant effect on price and the causality relationship from inflation to agricultural
prices is confirmed.

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Analysis of the Macroeconomic Variables Effect on the Agricultural Sector

Agriculture Science Developments Vol(3), No (11), November, 2014.

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Response to Cholesky One S.D. Innovations 2 S.E.

Response of PG to ER
30
20
10
0
-10
-20
1

10

10

10

Response of PG to IF
30
20
10
0
-10
-20
1

Response of PG to MO
30
20
10
0
-10
-20
1

Figure1. Reaction ofagriculturalpriceto shockcreatedonmacroeconomic variables

Rose Hashemi *
Agriculture Science Developments Vol(3), No (11), November, 2014.

Response to Cholesky One S.D. Innovations 2 S.E.

Response of LG to ER
800
600
400
200
0
-200
-400
1

10

10

10

Response of LG to IF
800
600
400
200
0
-200
-400
1

Response of LG to MO
800
600
400
200
0
-200
-400
1

Figure2. Reaction ofagricultural employmentto shockcreated onmacroeconomic variables

374