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Exchange Rates and U.S. Agriculture (Power Point Presentation)

  • Agricultural Science
  • Economics


Microsoft Word - TRoeCP.doc Agricultural Outlook Forum Presented: February 17, 2006 EXCHANGE RATES AND U.S. AGRICULTURE Terry Roe Professor of Applied Economics Co-Director of the Economic Development Center Director of the Center for Political Economy University of Minnesota Exchange Rates, Foreign Income, and U.S. Agriculture Terry Roe Professor of Applied Economics University of Minnesota Introduction • Demand for U.S. agricultural exports are sensitive to – Growth in trade partner real per capita income – Evolution of real U.S. trade partner exchange rate • Empirical evidence documenting these linkages is not available • Our purpose is to: – Review the issues – Look at the key data – Present empirical results – Discuss implications Background • The bundle of goods and services a currency can claim from another country is a broad measure of a country’s “competitiveness.” – In principle: A country whose economic “efficiency” is growing relative to its trade partners tend to experience an appreciating real exchange rate; • Consumers can claim more foreign goods • Producers face increased competition in foreign markets • Functioning capital markets cause currency exchange rates to equilibrate across countries (law of one price) • Market imperfections and policy interventions subvert these basic forces – Schuh (1974): Major component of the farm problem of the 1950’s was an “overvalued” dollar – The Betton Woods agricultural export boom of the 1970s attributed to a “devaluation” of the dollar linked to monetary expansion in response to energy shock – Literature: Monetary shocks, over – under shooting – Current: Major macroeconomic imbalances • The dollar as numeraire currency • Excessive savings • Budget deficits (U.S. spent 57% more than it earned on world markets) • Portfolio balances Implications • Underlying the basic economic forces and the market imperfections and policies tending to subver

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