Abstract
This paper focus on the time adjustment paths of the exchange rate and prices in response to
unanticipated monetary shocks following model developed by Saghaian et al. (2002). We
employ Johansen’s cointegration test along with a vector error correction model to investigate
whether agricultural prices overshoot in a transition economy. The empirical results indicate
that agricultural prices adjust faster than industrial prices to innovations in the money supply,
affecting relative prices in the short run, but strict long-run money neutrality does not hold.
Keywords: agricultural prices, exchange rates, monetary shocks, overshooting, transition
economy
JEL classification: C32, E51, P22, Q11
1. Introduction
There is a continuously growing literature on the agricultural transformation in Central an
Eastern European countries (see survey Brooks and Nash 2002; Rozelle and Swinnen 2004).
The research has focused on various aspects of transition, including land reform, farm
restructuring, price and trade liberalisation and etc. However, until now macroeconomic
aspects of agricultural transition were neglected. The agricultural economics literature has
emphasised the importance of macroeconomics and financial factors in the determination of
agricultural prices already in the second half of eighties (e.g. Bessler, 1984; Chambers, 1984;
Orden, 1986a,b; Devadoss and Meyers, 1987; Orden and Fackler, 1989). Recently there has
been renewed interest in the analysis of impact of monetary variables for agricultural prices
(Zanias 1998; Saghaian et al, 2002; Ivanova et al. 2003; Cho et al., 2004; Peng et al., 2004)
employing cointegration and Vector Error Correction (VEC) framework. Previous empirical
research based on mainly U.S. agriculture suggests that any changes in macroeconomic
variables should have an impact on agricultural prices, farm incomes and agricultural exports.
Therefore, it is reasonable assume that a transition country characterised less stable
macroeconomic environment these effects are more profound. Surprisingly, the interest has
been almost non-existent in Central-Eastern Europe, except Ivanova et al. (2003), who studied
the macroeconomic impacts on the Bulgarian agriculture.
Monetary policy has real and nominal effects on the overall economy and the agriculture in
short run and medium run, but generally no real effects in long run (Ardeni and Freebairn,
2002). There are number of direct linkages between monetary policy and agricultural sector.
However, in this study we focus exclusively on the overshooting hypothesis claiming that