The Impact of Energy Sector on Overshooting of Agricultural Prices

Mahdi Asgari, Sayed H. Saghaian, Michael R. Reed

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

The Federal Reserve shifted monetary policy from early 2016 by gradually increasing nominal interest rates until very recently (July 2019). A decline in commodity prices is expected in response to a contractionary policy. According to the overshooting hypothesis, agricultural prices could decrease more than their long-run equilibrium levels (i.e., overshoot) in the short run. This research contributes to the overshooting literature by including the energy sector in the overshooting model. The theoretical results show that flexible energy prices share the burden of the shock with other flexible prices and, thus, agricultural prices and the exchange rate overshoot but less than the results of prior studies. The empirical results confirm the theoretical expectation that agricultural commodities adjust faster than manufacturing prices, but energy prices reduce the extent to which agricultural prices overshoot. This adjustment behavior has implications for income stability and financial viability of farmers.

Original languageEnglish
Pages (from-to)589-606
Number of pages18
JournalAmerican Journal of Agricultural Economics
Volume102
Issue number2
DOIs
StatePublished - Mar 1 2020

Bibliographical note

Publisher Copyright:
© 2020 Agricultural and Applied Economics Association

Keywords

  • Commodity prices
  • dynamic price analysis
  • interest rates
  • monetary policy
  • overshooting hypothesis

ASJC Scopus subject areas

  • Agricultural and Biological Sciences (miscellaneous)
  • Economics and Econometrics

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