The impact of monetary policy on the U.S. cotton market

Date

1989-08

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Publisher

Texas Tech University

Abstract

This dissertation provides an empirical analysis of the impact of monetary policy on the U.S. agricultural product markets, specifically, the U.S. cotton market. The study developed a cotton sector model that recognizes the linkages between the monetary policy and the cotton sector through which the following variables are simultaneously determined: exports, consumption, inventory, domestic prices, productions and export price. The estimated model is tested via various validation procedures to ensure that the results are favorable. The analysis is then extended to use dynamic simulations to determine the effects of money induced changes in exchange rate on the cotton sector. For this purpose, two policy scenarios are examined: a sustained increase of money supply by five percent in 1971-1984 and a sustained decrease of money supply by five percent in 1971-1984.

The study indicates that changes in monetary policy have an important impact on the U.S. cotton market. An increase in money supply by depreciating the U.S. dollar raises the export of cotton. Moreover, this trade effect spills over to the domestic economy through price. The depreciation of the U.S. dollar increases export demand which crowds out domestic consumption and inventory. The results of the simulations also suggest that a decrease in money supply by appreciating the U.S. dollar makes the U.S. exports less competitive and causes exports of cotton to fall. The reduction in exports is associated with lower price of cotton which increases domestic consumption and inventory, and decreases domestic production overtime.

This study concludes that the performance of the U.S. agriculture depends on the macroeconomic developments, such as monetary policy. Because the U.S. agriculture is heavily dependent on foreign markets, the monetary phenomenon, such as the exchange rate, is likely to have a significant impact on agriculture. In particular, tight monetary policy by appreciating the U.S. dollar may have devastating effect on agriculture in the short run.

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