Tuesday, August 21, 2007

DISCRETIONARY MONETARY POLICY II: Macroeconomic Linkages to Agriculture

In the previous post, I noted that the miscalculations that result from discretionary monetary policy may have resulted in many of the economic crisis we have experienced this century.

With regards to agriculture, the macroeconomic linkages are very important. In the 1970’s expansionary monetary policy led to inflation. This was initially reflected in higher commodity prices and the appreciation of land values. These conditions and easy credit made it possible for many farmers to expand and invest in their operations.
Later, when the fed became worried about inflation the direction of monetary policy changed. Interest rates increased and the farm sector suffered with record foreclosures in the late 70’s and 80’s. The agriculture ‘bubble’ had burst.

This was discretionary monetary policy at its worst. Economists at the time believed there was a trade off between inflation and employment-i.e. economic bliss. It turned out that this was only a temporary phenomenon, that once realized, resulted in a crash.

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