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monetary changes can have real short-run effects on the prices of agricultural commodities.
This indicates that money supply is not neutral and monetary impacts can change relative
prices in the short run. The paper examines the short-run overshooting of agricultural prices in
Hungary using cointegration and VEC framework. The empirical results have also
implications for long-run money neutrality. This issue is important in transition countries,
because price variability is much less for industrial prices then for agricultural prices during
the transition period especially comparing similar price movements in developed countries.
Overshooting of agricultural prices can at least partially explain the observed agricultural-
price variability. These monetary impacts and financial factors have policy implications as
well. The short- and long-run impacts of monetary policy have been very important for the
Hungarian agricultural sector due to lack of credibility of farm policy, where farm incomes
are much more influenced by market prices. If money is neutral in the long run, commodity
price overshooting can still have significant effects on short-run farm income and the
financial viability of farms.

The paper is organised as follows. Section 2 discusses theoretical background and related
empirical evidence. The time series methodology employed is described in section 3. The data
and the results of empirical models are presented in the section 4. Finally, the conclusions and
implications of the results on the Hungarian agriculture are drawn in the last section.

2. Theoretical considerations and empirical evidence

At least since Schuh (1974) interest has continued in the possible impacts of monetary policy
on agricultural markets. This issue is important because policies to stabilise agricultural
markets should consider the sources of volatility within agri-food sector. The main issue is
that whether levels of agricultural and non-agricultural prices respond proportionally to
changes in the level of money supply in the long run, and whether money is neutral in short
run. Various explanations are available for relative price movements. It is usually assumed
that agriculture is a competitive sector in which its prices are more flexible than in non-
agricultural (fix price) sectors. Consequently, expansionary monetary policy favours
agriculture, because farm prices can be expected to increase faster than non agricultural
prices, while restrictive monetary policy shifts prices against agriculture. Bordo (1980) argues
that agricultural commodities tend to be more highly standardised and therefore exhibit lower
transaction costs than manufactured goods. Consequently, agriculture is characterised rather
short term contracts which lead a faster response to a monetary shock. Alternatively, Tweeten



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