Food Price & Money Supply : a Causality and Analysis for Bangladesh Economy

Topics: Economics, Inflation, Econometrics Pages: 9 (2499 words) Published: June 18, 2013
Journal of Social and Economic Policy, Vol. 6, No. 2, (2009) : 1-6

The impact of monetary shock on the food prices has been the hot issue in these days. This research attempts to investigate the direction of causality between the food prices and money supply in Bangladesh, using ARDL causality test. Empirical results show unidirectional causality from money supply to food prices in Bangladesh. Hence the money supply is not neutral in determining food prices. Therefore it recommended that in Bangladesh monetary policy instrument could use to control inflation in general and food inflation in particular case. Keywords: .ood Prices, Money Supply, ARDL. Jel Classification: E3, E51.

INTRODUCTION Recently Bangladesh has face strong upward pressure on food prices. According to the Bangladesh Bank (2008) the poor people normally face a higher rate of inflation than the non-poor in Bangladesh. This is likely to have additional undesirable penalty on the welfare of the poor in both rural and urban areas in the country. The analysis also shows that the higher inflation rate of the poor in recent years has mainly arisen from higher food prices which have larger weights in the consumption basket of the poor. These findings thus have significant implications for designing appropriate antiinflation policies by the government. Conventional agricultural economics examine that the food consumption and prices are determine by the interaction of supply and demand forces. In the short run, supply is relatively fixed and inflexible, and prices adjust so product clear the market. When supply more than demand, prices goes down and consumers buy more. Conversely, smaller supply of food than prices will be higher and smaller purchases. In the long run, framers adjust production in response to market prices, producing more of higher priced goods and less of lower priced goods. Demand of food in the aggregate is not very responsive to price changes because there is little room for substitution between food and nonfood goods in the consumer’s budget. However, demand for individual foods in more responsive to prices as consumers substitute among alternative food commodities. But on the other hand the least studies on the agricultural economics examines that the macroeconomics, particularly monetary factors effect on the agricultural prices Tweeten (1980) found that the monetary shocks little effect on the agricultural prices . David A. Bessler (1982) empirically finds out that causality from money supply to agricultural prices in Brazilian data. *

Economist, Applied Economics Research Centre University of Karachi, Karachi: Pakistan. E-mail: adnan.economist@yahoo.cpm



Devadoss and Meyers (1987) support the hypothesis that agricultural prices has faster response than manufacturing product prices to a change in money supply in the U.S.A. Dorfman et al., (1996) empirically find out that the agricultural sector receive gain from the positive money sock in the short run. Saghaian et al., (2002) empirically prove that the in the long-run money neutrality does not hold in the determination of agricultural prices in U.S.A. Xuehua peng et al., (2004) investigate that the monetary variables impacts on the food prices in China. Bruno et al., (2005) reject the non neutrality of money supply in the determination of food prices in the Canada & USA. Most of the related empirical research was conducted on the well developed market economies regarding macroeconomic variables impact on the agricultural prices. Compared with these markets, Pakistan’s agricultural commodity markets not well developed. But due to the financial reforms in Pakistan, it is anticipated that the monetary policy play a more vigorous role in affecting food prices in Pakistan. Hence, it is important...

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