Academic journal article Agricultural and Resource Economics Review

Exchange Rates, Foreign Income, and U.S. Agricultural Exports

Academic journal article Agricultural and Resource Economics Review

Exchange Rates, Foreign Income, and U.S. Agricultural Exports

Article excerpt

While it is generally accepted that change in the real value of the dollar is an important determinant of exports, it has not been rigorously demonstrated that this relationship, derivable from theory, holds empirically for agricultural exports and the components of agricultural exports. Starting with a dynamic maximizing framework, this paper estimates the real tradeweighted exchange rate and trade partner income effects on U.S. agricultural exports. For the period 1970-2006, a one percent annual increase in trade partners' income is found to increase total agricultural exports by about 0.75 percent, while a one percent appreciation of the dollar relative to trade partner trade-weighted currencies decreases total agricultural exports by about 0.5 percent. While these effects carry over to 12 commodity subcategories, they are conditioned by differences between bulk and high value commodities, and differences in the export demand from high compared to low income countries. We use a directed acyclic graphs (DAG) technique to identify the inverted fork causal relationships from vector autoregression (VAR) models. We also find that there is an asymmetric exchange rate effect so that the negative effect of exchange rate appreciation on exports sometimes dominates the positive effect of foreign income growth.

Key Words: exchange rates, U.S. agricultural trade, U.S. agricultural commodity exports, U.S. agricultural export prices, foreign income

(ProQuest: ... denotes formulae omitted.)

The exchange rate and foreign income growth are commonly assumed to be important macroeconomic variables affecting U.S. agricultural exports. Ample evidence suggests that the growth in demand for U.S. agricultural exports is caused by growth in trade partner real income, but strong empirical evidence is lacking on the effect of changes in the value of the dollar on U.S. agricultural exports. We utilize the ERS Exchange Rate Data Set, which defines commodity-specific real effective exchange rates based on commodity trade-partner export weights. The export-weighted exchange rates and trade-partner real gross domestic product are found to strongly affect the demand for aggregate U.S. agricultural exports. A similar relationship appears to hold for many subcategories of agricultural exports, although differences in magnitude between bulk and high value exports are evident. Some of these differences appear to be linked to the tendency for bulk commodities to be exported to lower income countries, while the high value commodities tend to be exported to higher income countries. We also find that growth in trade partner real GDP has positively influenced growth in U.S. exports over the period 1970-2006, while changes in the real trade-weighted exchange rate have tended to constrain exports.

Knowing the effects of exchange rate and foreign income on U.S. agricultural exports is important for understanding the impact of policies directed toward economic growth and development, compared with those designed to address major macroeconomic imbalances. How these effects are likely to vary by commodity group is also important. For example, the higher the income elasticity of export demand, the larger the impact of trade partner income growth on increasing the demand for U.S. agricultural exports. This also suggests the evolution of a policy to target exports to high potential demand countries. The higher the price elasticity of a commodity real trade-weighted exchange rate, the more competitive is the international market for exports of a particular country, and the more sensitive are U.S. exports of this commodity to policy-induced distortions in trade partner currencies.

It has been difficult to find empirical evidence linking the relative value of the U.S. currency to exports in spite of the tendency for conceptual models to predict such a relationship. In his award-winning article, G. Edward Schuh (1974) argued that a major part of the farm problem of the 1950s could be attributed to an overvalued dollar, which depressed agricultural prices and exports. …

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