Chambers, Robert G.

English

Research Papers in Economics

SOUTHERN  JOURNAL  OF  AGRICULTURAL  ECONOMICS  JULY,  1983
DISCUSSION:  IMPACT  OF  FEDERAL  FISCAL-MONETARY  POLICY
ON  FARM  STRUCTURE
Robert G. Chambers
I am going to separate my remarks on Luther Tweet-  All equations were estimated in log-log  form, and,
en's paper into  two categories,  those on the empirical  of course, all coefficients on the independent variables
content of the paper and those on  its conceptual con-  can be interpreted as elasticities.  Now to the results. In
tent.  I shall  address the empirical part of the paper first,  both the PG and PC equations the  short-run elasticity
then discuss the conceptual  part,  and close  with some  is not significantly different from unity; thus,  it is im-
challenges facing agricultural economists  interested in  possible to  infer from these equations  that  there is  a
macroeconomic  issues.  short-run  effect  of  inflation.  However,  in  both  in-
stances the long-run multipliers are negative, implying
EMPIRICAL ISSUES  that  inflation depresses  agricultural  prices  relative  to
nonagricultural  prices.  This I find hard to believe.
The bulk of Tweeten's  empirical  analysis  seems to  One might,  therefore,  ask what the problem is.  My
be an attempt to settle a dispute with Bruce Gardner on  answer is that I am not sure equations such as these and
the magnitude of the secondary effects  of fiscal-mon-  those in Tweeten's (or Gardner's) paper are all that in-
etary  policy,  via inflation,  on real  farm prices.  This  formative.  Others  might  say  that I am not estimating
section ends with a call for an unbiased judge to decide  an input supply  model  of the  same  form  as Tweeten
whose results are more plausible.  Being a colleague of  since I am effectively dealing with a normalized price,
Gardner who happens to think Tweeten might be right  the  denominator  of which  should  be explicitly  mod-
(at least in the short run) certainly  does not qualify me  eled by another structural equation.  My response  is that
as  an unbiased judge.  Biased or not,  however,  I  am  in Tweeten's Table  1 we no longer have input supply
willing to say  that neither gentleman's  arguments are  equations  as he suggests.  Instead  we  have ad hoc  re-
very convincing.  duced-form equations for prices paid by farmers,  since
Let me explain. Tweeten presents us with a series of
equations  involving several  permutations of argu-
ments to conclude that the prices farmers pay for their  Table  1.  OLS  Estimates U.S.  Annual  Data (1948-
inputs  are not neutral  to inflation.  He then uses these  80)
results in conjunction  with estimates from another study
to infer that the  short run elasticity  of the parity ratio
with respect to the GNP deflator is approximately  1.3.  Dependent  Variable
Regressors  PAR  PAR Although  I  have  several  questions  about  his  econo-  Regressors  PAR  PAR a  b
metric  methodology,  my most obvious question  is why 
. *  *  1  . *  1  1 *  1  Constant  2.36668  2.54491 not use the parity ratio  as a dependent variable  in the  o(.stat7238)  (.7208
model?  Certainly,  one can view the parity  ratio as an
appropriately normalized  input price;  such  a concep-  Lagged  dependent  .621546  .618251
variable  (.110809)  (.105830) tualization is compatible with the input supply frame-  variable  (.110809)  (.105830)
work developed by Tweeten.  PG  .995163
I have reestimated Tweeten's  model as described in  (.577041)
his Table  1 with the parity  ratio replacing prices  paid  PGL  -1.16783
by farmers as the dependent variable; the results are re-  (.625423)
ported in Table  1. My data are  not exactly consistent  PC  .901861
with those of Tweeten, but they are close. All data were  (.462721)
derived from Business Statistics on an annual basis for  PCL  -1.09958
the period  1948-80,  hence  our  time  periods  do  not  (.517542)
match exactly.  Variables are defined as follows: PAR 
2 .852130  .84220
is the parity ratio (1910-14  used as  a base),  PG is the
implicit GNP deflator (base year 1972),  and PC is the
consumer price index (base year  1967).
Robert G. Chambers is  a visiting professor,  Department of Agricultural  and Resource  Economics,  Oregon State  University, and  an associate professor,  University of Maryland,  on leave.
Invited discussion  presented at the annual  meeting of the Southern Agricultural  Economics  Association,  Feb. 6-9,  1983 Atlanta.  Invited discussions are routinely published in the July SJAE
without editorial council  review but with review by the copy  editor (as  per Executive  Committee action June 25,  1982).
Comments  from D. Hueth and  U.  Vasavada are appreciated.  Computations reported were  carried out by U.  Vasavada.
69in these equations Tweeten has dropped all of the other  farm sector.  Although  I have a few quibbles  with this
independent  variables,  including the  input quantity,  section,  for example,  no emphasis  is given to the pos-
from the  input supply  equation.  An equation  without  sible effects of high interest rates and tight money  on
an input quantity  in it is not interpretable  as a supply  storage  and production  decisions,  by  and large  I  find
equation,  but it may be interpreted  as a reduced-form  myself in agreement with much of his analysis. The di-
equation from  an unspecified structure.  Thus,  my  rection  taken  is  important and should  be further pur-
model can be construed as a reduced-form equation in  sued.
the very same sense  as Tweeten's model.  I would like to close my discussion with a few gen-
The flaw  lies,  however,  with the  specification  of  eral remarks about our understanding of the effects of
models of this  sort.  To  my mind,  they beg  the ques-  monetary  and fiscal  policy on agriculture  as a profes-
tion.  Rather  than directly  examinining  the  impact  of  sion.  Although the subject area is not new (having roots
actual fiscal-monetary variates  on the agricultural sec-  in Schultz's classic  work, Agriculture in an Unstable
tor, they regress one jointly dependent variable  (prices  Economy),  it  is  of  much  current  interest.  Unfortu-
in agriculture)  upon other jointly dependent variables  nately, it catches us at a time when we as a profession
(prices not in agriculture, interest rates) as if it were le-  are very poorly prepared to deal with it. Although I am
gitimate to assume  the casual direction  only runs  one  a relatively new member of the profession and thus may
way. I  do not believe this, and there exists  a large lit-  be in a poor position to judge, it seems to me that ma-
erature (e.g.,  Cooper and Lawrence)  suggesting  that  croeconomics  has recently been considered as a legit-
commodity prices have a significant  impact on the rest  imate area of interest for agricultural economists.  This
of the economy.  bias or prejudice is reflected in the training of many of
We need to move beyond such secondary analysis to  us who have received only a smattering  of macroecon-
analysis  that focuses  directly  on the effect of various  omic theory in our graduate curricula.  It is my opinion
macroeconomic  policies  on the  agricultural sector.  that this neglect in training shows not only in the prob-
While problems of multicollinearity  and  simultaneity  lems we consider but also in the way we research prob-
make this an empirically difficult task, relatively sim-  lems  involving  macroeconomic  linkages  with
pie and plausible approaches  are being developed (e.g.,  agriculture.
Sims). If we only had to update our empirical tools, we  One element common to much of the current and re-
would be in a relatively good position.  Unfortunately,  cently completed  research  on these issues  is our very
we have only vague ideas of the avenues by which fis-  incomplete  way of viewing the problem.  Rather  than
cal-monetary  policy  affects  agriculture.  As  agricul-  seeing agriculture as an integral part of a general econ-
tural  economists,  we  must,  therefore,  develop  omy,  we  tend to view agriculture  as  a sector affected
consistent  conceptual  models of  the  interactions  be-  by a larger "macroeconomy."  The assumed causality
tween agriculture  and the  rest of the economy  before  in  these  models  clearly  runs  from  the  "macroecon-
we plunge  blindly ahead  with questionable  data anal-  omy"  to  agriculture.  Examples  of  such  research  in-
ysis. But herein lies the real contribution of Tweeten's  elude a good bit of my own published work, so I am as
paper,  for most of it is  devoted  to laying the  ground-  culpable as any in this regard.  However,  I feel that it
work for such a task.  is time for us as a profession to move beyond such re-
Before  turning  to my comments  on the  conceptual  search  and  try  to  integrate  our  research  effort  more
portion of Tweeten's paper and my closing remarks,  I  closely  with  state  of the  art macroeconomic  theory.
would like to point out a few remaining  areas where I  After  all,  partial  equilibrium  models  of the effects  of
disagree  with Tweeten's  empirical  analysis.  As I stated  general  equilibrium  phenomena  are almost  by defini-
before,  I  see no  reason, regardless  of the size  of cal-  tion a contradiction.
culated t-statistics, that allows one to drop input quan-  Another  aspect  of this problem  is  our tendency  to
tity from  an input supply equation.  Furthermore,  low  look past the problem of the effect of macroeconomic
calculated  "t-values"  are not,  as Tweeten suggests  in  policy on agriculture to such issues as the effect of in-
his discussion  of Table  1, evidence  of exogeneity  of  flation  or recession on  agriculture.  While  this is  a le-
input quantity  in a simultaneous equations framework.  gitimate and important area of research for agricultural
This  seems  more  like  evidence  of  an  inappropriate  economists,  it has been perhaps  the major area in which
specification of the input supply relationship.  Finally,  we have  exhibited  our ignorance  of current develop-
when Tweeten discusses equations  for agricultural  price  ments  in  the  general  literature  on  macroeconomics.
variables  deflated  by the  GNP deflator,  one  must  re-  Hence,  there  are more  than a few studies  conducting
member that regressing such variables on the GNP de-  research  on  the basis  of dummy  variable regressions
flator  involves  an  element of  simultaneous  equation  where  inflationary  or other macroeconomic  phenom-
bias.  ena periods  are  arbitrarily  designated,  transformed  into
dummy  variables,  and then used  as regressors  (some-
CONCEPTUAL  ISSUES  times  the  only regressors)  in  explaining  agricultural
variables of interest.  At best the implications of this type
My  remarks  on Tweeten's  conceptual  analysis  are  of results  are limited.  More frequently,  however,  one
brief, largely  because I feel this part of the paper does  is  reminded of the old saw  all graduate  students have
an  admirable job of providing  a mainly  heuristic  but  heard at least  once:  "they don't call  'em dummy var-
basically  sensible  analysis of the  implications  of var-  iables for nothing."
ious fiscal-monetary policy mixes on parts of the U.S.  Developments  in  modem  macroeconometrics,  in-
70cluding  the vast  regional expectations  literature  and the  economists interested  in such issues  move forward to
already mentioned developments  by Christopher Sims  direct investigations of these matters and stop looking
in  the  area  of vector  autoregression  modeling,  high-  only at secondary effects with second-best techniques.
light our naivete  in this regard.  It is  time agricultural
REFERENCES
Cooper, R.  N.,  and  R.  Z. Lawrence.  "The  1972-75 Commodity  Price Boom."  Brookings Papers on Economic
Activity (1975):671-715.
Gardner,  B.  "On the Power of Macroeconomic  Linkages to Explain Events in U.S.  Agriculture."  Amer. J. Agr.
Econ. 63(1981):872-78.
Schultz,  T. W. Agriculture in An Unstable Economy. New York:  McGraw-Hill,  1945.
Sims,  C.  A.  "Macroeconomics  and Reality."  Econometrica 48(1980):1-48.
U. S.  Department of Commerce,  Bureau of Economic Analysis. Business Statistics. Washington,  D.C.,  1981.
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Agriculture in An Unstable

DISCUSSION: IMPACT OF FEDERAL FISCAL-MONETARY POLICY ON FARM STRUCTURE

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