Macroeconomic Impacts on Canadian Agricultural Prices

Abstract

Interest in modeling the relationship between the macroeconomy and the agricultural economy has risen steadily since Schuh's 1974 article which illustrated the potential effects of macroeconomic policy shocks on the agricultural sector. A variety of authors has examined the effects of exchange rates, interest rate, money supply and general price level shocks on agricultural variables (prices, exports, etc.). A variety of techniques has also been used to examine these relationships. Both structural econometric models and time series approaches have been employed. In this study a new economietric technique, Vector Autoregressive (VAR) modeling, is used to investigate the impact of macroeconomic factors on the Canadian agricultural sector. Vector Autoregressive models (VARs) are dynamic simultaneous equation models. VAR models allow the data to provide a representation of the changes in the system without the restrictions on coefficients that are usually used in the estimation of simultaneous equation econometric models. VAR models focus on the dynamic paths of the variables in the system. They provide a concise summary of the dynamic interrelationships in an economic system. In this study, several forms of VAR models are used to examine the dynamic interaction of agricultural prices, exports and macroeconomic variables. There are a number of significant conclusions from the empirical analysis performed in this study. First, there appear to be significant macroeconomic impacts on the Canadian agricultural sector. Other studies of macroeconomic-sectoral linkages have found limited impact of macroeconomic factors. This study, however, using a relatively new methodology, has discovered a stronger integration. The strongest linkage appears to be between interest and exchange rates and agricultural output prices. There is little direct impact from domestic inflation. Such a result is not surprising given the international nature of Canadian agriculture. Input prices do not appear to be as significantly affected by macroeconomic shocks as are output prices. Such a result may be interpreted as providing support to the hypothesis that input and output prices in agriculture exhibit the fixed-price flex-price phenomenon. The methods used in this study are relatively new and they provide a flexible approach to modeling economic time series. It is apparent that the conditions assumed by the researcher significantly affect the empirical results. In this study we have modified existing techniques to provide more plausible identification restrictions on the model. The results indicate that the agricultural sector, in particular through agricultural output prices, is sensitive to exchange rate and interest rate variation. The techniques used here may be applied in future research to investigate the impact of macroeconomic variables on specific commodities and on regions of the country.