The Impact of Energy Sector on Overshooting of Agricultural Prices

18 Pages Posted: 24 Mar 2020

See all articles by Mahdi Asgari

Mahdi Asgari

affiliation not provided to SSRN

Sayed H. Saghaian

University of Kentucky

Michael R. Reed

University of Kentucky - College of Agriculture - Department of Agricultural Economics

Date Written: March 2020

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.

Keywords: Commodity prices, dynamic price analysis, interest rates, monetary policy, overshooting hypothesis

Suggested Citation

Asgari, Mahdi and Saghaian, Sayed H. and Reed, Michael R., The Impact of Energy Sector on Overshooting of Agricultural Prices (March 2020). American Journal of Agricultural Economics, Vol. 102, Issue 2, pp. 589-606, 2020, Available at SSRN: https://ssrn.com/abstract=3558950 or http://dx.doi.org/10.1002/ajae.12035

Mahdi Asgari (Contact Author)

affiliation not provided to SSRN

Sayed H. Saghaian

University of Kentucky ( email )

Lexington, KY 40546
United States

Michael R. Reed

University of Kentucky - College of Agriculture - Department of Agricultural Economics ( email )

308 Charles E. Barnhart Bldg.
Lexington, KY 40546-0276
United States
859-257-7259 (Phone)
859-323-1913 (Fax)

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