The Transmission Of Exchange Rate Changes To Agricultural Prices

Movements in exchange rates can change the prices of goods faced by producers and consumers and thereby affect incentives to produce, consume, and trade goods. Exchange rate changes, however, might not be completely transmitted (passed through) to domestic prices. Price and exchange rate transmission for ag. products is low in most developing economies, partly because of trade policies but also because of inadequate infrastructure and other market deficiencies. During the last 20 years, developed and developing countries have moved away from support policies that impede price and exchange rate transmission toward trade policies that allow transmission, such as tariffs. However, market deficiencies remain as a cause of incomplete transmission. Illus.

This monograph examines the impact of direct and indirect government intervention in Colombia's coffee, cotton, rice, and wheat markets between 1960 and 1983 and compares it with the situation that would have prevailed in the absence of intervention. The effects of intervention on prices, production, consumption, net foreign exchange earnings, the real income of producers and consumers, and transfers of income between agriculture and the rest of the economy are evaluated. As a result of state interventions (direct and indirect) in the market for the four commodities, production of these commodities fell below its potential level : a difference of 20 % for coffee and rice, 40 % for cotton, and 15 for wheat. These interventions were maintained even though they hurt agricultural producers. The report points out that one reason for intervention is to help consumers, but the results show that real annual incomes of the poorest consumers of rice and wheat derived products never increased by more than 3 percent. Direct intervention, however, isolated the domestic from the international market and thus prevented the transmission of variations in international prices to domestic prices.

This book is an outcome of the conference on the linkages between macroeconomics and agricultural trade in 1986. It establishes some of the fundamental influences on the exchange rate. The book develops linkages between the macroeconomy and agriculture using traditional models.

Covers the period from the early 1960s until 1987.

This paper analyzes the appropriate choice of an exchange rate regime in agricultural commodity-exporting economies. In an open economy model that incorporates key structural characteristics of agricultural commodity exporters including dual labor markets, the benefits of exchange rate flexibility are shown to depend on the extent of labor and product market development. With developed markets, flexible exchange rates are preferred as they allow for greater relative price fluctuations, which amplify the transmission mechanism of labor reallocation upon commodity price volatility. When labor and product markets are not welldeveloped, however, international relative price adjustments exacerbate currency and factor misalignments. A nominal exchange rate peg, by mitigating relative wage and price fluctuations, increases welfare relative to a float. Given the current low level of labor and product market development across most agricultural commodity exporters, the study provides a counterpoint to conventional arguments in favor of flexible exchange rates and a rationale as to why exchange rate targeting is appropriate in agricultural economies.

Attempts to connect the diverse aspects of appropriate price policy in the following sequence: 1) the implementation issues and impact on the domestic marketing sector, 2) the nature of the world market price, 3) the disaggregated effects on producers and consumers, 4) the short-run macro effects on budgetary, fiscal, and monetary policy, 5) the impact of macro prices, especially the foreign exchange rate, 6) the spillover effects of price policy for one commodity market on other commodity and factors markets, on the agricultural sector as a whole, and on the entire economy, 7) the dynamic effects on employment, investment, and economic growth (Author).