The Dangers of Monetary Policy in Agrarian Economies: A Rejoinder

Professors Patrick and Chandler have shown, carefully and correctly, that my analysis depends critically upon a particular assumption. Despite their vehement disagreement with this assumption—that farmers will hold a larger part of their wealth in foodgrains when the alternative is to convert those grains into money at declining prices- -I still believe in its realism and am grateful for the opportunity to elaborate its defence: 1) Farmers tend to be optimistic about future prices and outputs; the strain of existence might be unendurable without this optimism. The result is that high prices are quickly seized upon by farmers as normal prices. 2) Farmers have short memories and treat recent prices as expected future prices. For example, agricultural supply studies in Pakistan show that the use of several lagged prices fails to improve regressions; just last year’s price is sufficient to explain almost the entirety of any response to price1, Thus last year’s high price becomes this year’s expected price; but more important, it becomes this year’s concept of a “normal” price.