Monetary Policy on Agriculture
Typically, there are two main types of monetary policies; a contractionary monetary policy which is otherwise known as tight monetary policy and expansionary or loose monetary policy. Expansionary money policy plays an important role in the economy as it tends to increase the total supply of money in an exponential manner while on the other hand, contractionary money policy expands the money supply in the economy slowly than normal rate (International Monetary Fund, 2013). This paper will analyze the role of monetary policy in agricultural foods prices.
Currently, monetary policy is facing a serious challenge due to the trend of rising food prices in the economy. This is particularly in low income and middle-income countries. If a contractionary money policy is enacted, it would be ineffective particularly in the face of exogenous shock comparable to relative prices (International Monetary Fund, 2013). Within this context, it is plausible to suggest that such a policy may be the cause of prevailing food price inflation. Besides, if the government decides to tighten monetary policy, it will negatively affect response in agricultural supply and slow down growth especially in countries experiencing high energy and food prices. On the other hand, enacting expansionary monetary policy due to the need of managing real exchange rate appreciations and capital inflows is more likely to negatively affect agricultural response and eventually exacerbate the prevailing agricultural situation (International Monetary Fund, 2013).
. In other cases, contractionary money policy tends to shrink the money supply in a given economy. The central bank and the government are supported by monetary policy in the process of controlling interest rates, money supply including the availability of money in boosting the economy such as through agriculture.