Transcript Transmission of Policy Actions to Agriculture

Transmission of Policy
Actions to Agriculture
There are numerous channels through
which changes in monetary and fiscal
policies can be transmitted to the farm
business sector.
Stabilization Policy
“Economists use the term stabilization policy to
refer to policy actions aimed at reducing the
severity of short-run economic fluctuations.
Because output and employment fluctuate
around their long-run natural rates, stabilization
policy dampens the business cycle by keeping
output and employment as close to their natural
rates as possible.”
N. Gregory Mankiw, macroeconomics, fourth edition, 2000, p.249
Stabilization Policies

Fiscal Policy
The use of taxing
and government
spending for the
specific purpose of
stabilizing the
economy.

Monetary Policy
Actions taken by
central banks to
influence the money
supply or interest
rates in attempts to
stabilize the
economy.
Short-Run Effects of Policy Actions
on Key Economic Variables
Expansionary and contractionary
applications of fiscal and monetary policy
affect the farm business sector indirectly
through the prices farmers receive for
their products and pay for their inputs as
well as through the nominal interest rates
(real rate of interest plus the rate of
inflation) they are charged on new loans.
Short-Run Effects of Policy Actions
on Key Economic Variables
Expansionary
Fiscal Policy
Contractionary
Fiscal Policy
Increase Deficit
Decrease Deficit
Domestic Demand
Raise
Lower
Export Demand
Lower
Raise
Uncertain
Uncertain
Farm Input Prices
Raise
Lower
Real Interest Rate
Raise
Lower
Inflation
Raise
Lower
Policy Action
Policy Effects on:
Farm Product Prices
Net Impact on Price
Short-Run Effects of Policy Actions
on Key Economic Variables
Expansionary
Monetary Policy
Contractionary
Monetary Policy
Increase MS
Decrease MS
Domestic Demand
Raise
Lower
Export Demand
Raise
Lower
Net Impact on Price
Raise
Lower
Farm Input Prices
Raise
Lower
Real Interest Rate
Lower
Raise
Inflation
Raise
Lower
Policy Action
Policy Effects on:
Farm Product Prices