Supply of Money and Food Prices: The Case of Greece

Abstract

AbstractRelationships between monetary variables and price indices continue always to be the subject of research interest and studies. This paper examines the relationship between money supply and retail food prices in Greece, using individual time series of monthly data for these variables. ADF unit root testing shows that both series are non stationary at their levels. However, the series are stationary at their first differences and further analysis shows that the two 1(1) variables are cointegrated, having a stationary, proportional, long-run equilibrium relationship. Similar conclusions are derived using other tests as well. Subsequently, both, the Johansen and Engle-Granger procedures are implemented. Estimation of Vector Error Correction (VEC) models allows for the derivation of the cointegrating vector and relationship, and results seem to justify the argument of money neutrality with regards to food prices. VEC estimation makes feasible also, the calculation of the adjustment speed to the long-run equilibrium between the two variables considered.Keywords: Unit roots, cointegration, money supply, food prices, VAR, VEC.(ProQuest: ... denotes formulae omitted.)IntroductionThe existence and nature of relationships between money supply and price indices has been a quantitative research issue, in order to assess the impact of monetary policies and liquidity on individual price indices or the relative prices between different groups of commodities. This is also true for prices related to agricultural activity, such as farm producer prices, marketing costs, prices paid by farm producers for inputs, and consumer food prices.Alternative theories have accompanied relevant findings. According to the costprice squeeze given the oligopolistic nature of the farm input industries, the inflationary results of an expansionary monetary policy would lead to deterioration of agriculture's terms of trade. This is because prices paid by producers rise faster than prices received (Tweeten and Griffin 1976, Tweeten 1980, 1989). Moss (1992) has also examined the cost-price squeeze hypothesis, using cointegration analysis. Other authors (Bordo 1980, Rausser, Chalfant, and Stamoulis 1985, Frankel 1986) argue that expansionary monetary policy favors agricultural relative prices while the opposite occurs when monetary policy is contractionary. The underlying assumption is that the farming sector operates under more competitive conditions and price flexibility, which may result in short run price overshooting above levels of long run equilibrium when money supply rises. However, money maintains its neutrality in the long run, once adjustments to changes in money stock have been completed.Greater sensitivity of agricultural prices to monetary shocks has also been found in Choe and Koo (1993). The same study finds a long run equilibrium relationship between money supply, agricultural prices and manufacturing prices, using a three variable Vector Autoregressive Model (VAR). However, no relationship was established between money supply and each one of the other two variables separately. Some uses of VAR models or impulse response functions derived from them, found varying degrees of response of agricultural prices to monetary changes and non neutrality of money for agricultural prices in US (Chambers 1984, Orden 1986, Devadoss and Meyers, 1987), Canada (Taylor and Spriggs 1989), and Brazil (Bessler, 1984). These results, based on traditional time series techniques and ignoring the long run behavior of the examined variables, are questionable according to Robertson and Orden, (1990) who found evidence of money neutrality with respect to agricultural prices in New Zealand.Since Cairnes (1871), the issue of factors affecting the speed of adjustment of agricultural prices to a changing supply of money was dealt with in several studies (Bordo 1980, Han, Jansen, and Penson 1990, etc). In the mentioned studies of Choe and Koo (1993) and Chambers (1984), agricultural prices were more sensitive than manufacturing prices to monetary changes in the short run. …