U. S. monetary policy and the exchange rate: effects on the world coarse grain market

During the 1950s and 1960s, the United States benefited from relatively stable monetary policy. This stability largely reflected the weaknesses of monetary policy as a domestic policy tool under the prevailing international monetary system of fixed exchange rates. Consequently, the relationship between the agricultural sector and monetary policy was not obvious, well-understood, or perhaps even significant;The general concern of this study is the effect of U.S. monetary policy on the U.S. and world agricultural markets. The specific objectives are to investigate the nature of U.S. monetary policy between 1960 and 1980, to investigate the channels through which U.S. monetary policy influences world agricultural markets, and, finally, to conceptualize a model of the world coarse grain market with which to evaluate the impacts of U.S. monetary policy. The coarse grain market is used primarily because coarse grains are the foremost agricultural commodities traded in world markets. Also, since coarse grain is utilized mainly by the developed countries as a livestock feed, significant world market participants are few, limiting the size of the model required for the analysis;The study demonstrates that following the move from fixed to flexible exchange rates in the early 1970s, U.S. monetary policy became variable. The increased volatility of the money supply is, then, hypothesized to have increased the volatility of the value of the dollar, and, perhaps, U.S. prices and exports;To analyze the problem, this study follows the monetary approach to exchange rate determination in constructing a nonlinear, nonspatial price equilibrium world model of the coarse grain market which includes six major exporting countries--the U.S., Argentina, Canada, Australia, South Africa, and Thailand--and two major importing countries--Japan, and the USSR. Prices are linked among countries in the model through price transmission equations which account for policy-induced world market price divergences;Simulation of a five billion-dollar sustained increase in the U.S. money supply indicates that because of the inelastic world import demand, elastic U.S. export supply, and inelastic export supplies of other regions, the effects are minor. Furthermore, the U.S. competitive position improves in the world market, while its prices change by less than all the other regions.