Monetary and fiscal policies' effect on agricultural growth: GMM estimation and simulation analysis

a r t i c l e i n f o The concept of sustainable economic growth is closely linked with the agricultural growth. This is especially true in the context of underdeveloped countries. Pakistan is a typical underdeveloped country that has huge labor force employed in conventional rural economy and more than half of the population relies on agriculture for subsistence. The study examines the agricultural growth through developing a model using the data from agricultural sector of Pakistan for the period 1972–2010. The model is primarily based on input–output reduced form structural equations approach. It is then estimated by GMM, validated and used for deterministic simulation analyses. Finally the validated model is used to critically analyze the impact of fiscal, monetary and energy policies on the agricultural output. We conluded that recent fiscal and monetary policies should be continued , while the energy policy needs to be modified in order to improve the agricultural GDP and reduce the rural poverty situation in the country. Growth in agricultural productivity is central to overall economic development and poverty reduction (see, for example, Fare et al. The use of inputs such as fertilizers and better seeds has been achieved considerably during the Green Revolution in 1980s. Moreover, the growing interest in national food security especially in South Asian countries stirred by recents supply shortages and restricted international trade during short supply periods boosts the importance of domestic agricultural sectors. Production of adequate amounts of agricultural output is essential for food security, which has been a major concern since the mid-1990s spanning a spectrum from the individual to the global levels (FAO, 2010; World Hunger, 2011). Growing agricultural sector ensures the employment and sustenance of masses living in rural areas in the agrarian economies. Although agriculture is operated entirely by private sector yet public policy plays an important role in the sectoral growth of developing countries due mainly to resource constrainted farming communities. Historically, public sector influenced domestic agriculture directly through fiscal measures and setting price of output low to ensure the availability of inexpensive food for the masses as well as indirectly through monetary policy. Subsidized fertilizers were made available to ensure optimal inputs use for increasing productivity and such subsidies were a major component of Public Sector Development Plan of Pakistan during 1980s and 1990s. Recently, the public influence on agricultural prices and fertilizers subsidy has gradually been reduced. Moreover, …