Exchange Rate, Prices and Agricultural T d Wh t H
Trade: What Have We Learned?
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Discussant Comments
Munisamy Gopinath
IATRC Organized International Track Section Session
International Track Section Session
AAEA Annual Meeting
Denver, CO, 2010
Ed Schuh’s Contribution to Exchange Rate Analysis
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• Market
Market versus government for the organization of versus government for the organization of
social, economic and political activities
– How
How appropriate to the current political debate on big appropriate to the current political debate on big
government, taxes and regulations! • Agricultural transformation: Key determinant of g
y
monetary and exchange rate policies in the “Golden Age”
– Currently, these forces are exogenous to this sector
Ed Schuh (continued)
Ed Schuh (continued)
• Either
Either the chaos following the collapse of the the chaos following the collapse of the
Bretton Woods or the complexity of exchange rate determination (or something else) led
rate determination (or something else) led Schuh to focus on the effects of exchange rate changes on agriculture
changes on agriculture
• Thanks to Terry Roe for reminding us and highlighting Schuh’ss contributions, which are highlighting Schuh
contributions which are
highly relevant to today’s policy debates
Exchange Rates and Commodity Prices
Exchange Rates and Commodity Prices
• Abbott’s presentation drawing on his Farm bbott s p ese tat o d a g o
s a
Foundation report and subsequent research nicely lays out the structure to analyze exchange rate effects on commodity prices and trade
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– Draws on a cost and demand structure, where exchange rate impacts a country’ss internal prices and exchange rate impacts a country
internal prices and
traded quantity (small and large economies)
– Like Schuh, Abbott justifiably abstains from exchange rate determination
– Extensively reviews mixed evidence on causality from recent studies (2008 commodity price boom)
recent studies (2008 commodity price boom)
Exchange Rates and Prices (continued)
Exchange Rates and Prices (continued)
• Abbott
Abbott also supports the theme that also supports the theme that
agriculture has now become an “innocent bystander” adjusting to shocks from broader bystander
adjusting to shocks from broader
economy
– Discussion on recent shocks: recessions, monetary Discussion on recent shocks: recessions monetary
policy, and energy policy.
• However
However, exchange rate effects depend on net exchange rate effects depend on net
trade (excess demand/supply) elasticities, which need additional research attention
which need additional research attention
Exchange Rate Volatility vs. Uncertainty • Modeling exchange rate risk and uncertainty (ex‐
ode g e c a ge ate s a d u ce ta ty (e
ante) and measuring volatility and its effects on trade (ex‐post) remain critical areas of research in agricultural, and in general, applied economics
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• While it is intuitive to appeal the negative effects of volatility on trade to agents’ risk aversion, f l tilit
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t’ ik
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financial markets allow not only hedging but also speculation
– Risk‐neutral or risk‐loving speculators are key to the smooth functioning of financial markets
Volatility vs. Uncertainty (continued)
Volatility vs. Uncertainty (continued)
• SSheldon noted that volatility effects would e do oted t at o at ty e ects ou d
diminish as agents gained experience
– Most of the trade since 1970s is among “old friends,” i.e. intensive margin dominates global trade.
– So, I suspect some structural change in the negative effects of volatility over time and between “old”
effects of volatility over time and between old and and
“new” friends – a possible topic for future research (aggregate study)
– With firm heterogeneity and concentration of food hf
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trade among few large firms, it would be worth looking at the within industry variation of these g
y
effects (entry costs?)
What Have We learned?
What Have We learned?
• Exchange rate and its volatility significantly affect agricultural commodity prices and trade although we need to improve our measure/estimate of such effects and understanding of the channels (primary agr.)
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(p
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• Exchange rate shocks have become exogenous to agriculture, forcing painful adjustment in developed and developing countries and possibly, affecting firms’ and developing countries and possibly, affecting firms
decision to export
• What can we do to alleviate the effects on agriculture, especially large shocks? Anticipated gains from trade especially large shocks? Anticipated gains from trade
may not materialize without some additional attention to this important issue