Monetary Policy and the FarmlNonfarm Price Ratio: A Comparison of Effects in Alternative Models

INCE 1974, FOLLOWING PUBLICATION of Schuh’s “The Macroeconomics of Agriculture,” much research effort has been devoted to determining whether and how monetary policy affects the farm sector. One of the more active areas of interest has been the question of whether changes in the money stock affect the farm! nonfarm product relative price ratio. The reason for this particular interest, as described by Tweeten (1980), is that declines in the relative price ratio represent a “cost-price squeeze” for farmers; thus, he suggests, if contractionary monetary policy causes farm prices to adjust downward more quickly than farm input prices, farm income will decline as well. Penson and Gardner (1988), surveying the relevant literature, conclude that the agricultural sector has borne the brunt of adjustment costs whenever slower money growth has occurred.