Open AccessThe Dangers of Monetary Policy in Agrarian Economies: A Comment
Author(s) -
Hugh T. Patrick,
Lester V. Chandler
Publication year - 1962
Publication title -
pakistan development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.154
H-Index - 26
ISSN - 0030-9729
DOI - 10.30541/v2i2pp.269-275
Subject(s) - economics , agrarian society , nothing , commodity , agriculture , speculation , money supply , monetary economics , monetary policy , price level , consumption (sociology) , relative price , economy , keynesian economics , macroeconomics , market economy , ecology , philosophy , epistemology , sociology , biology , social science
In an interesting recent article in this Journal1 Richard C.Porter presents a model "to show that, in agrarian (or predominantlyagricultural) economies it may be impossible to counteract apparentlytemporary shifts in the price level by means of traditional monetarypolicy". In Section III, to which this comment relates, he assumes atwo-sector model, with one sector (agriculture) producing the singlecommodity (foodstuffs) in the economy and the other sector living onlump-sum transfer payments from the agricultural sector and producingnothing. These lump-sum taxes are fixed and in money form; Porter in afootnote (p. 61) assumes (incorrectly, as is discussed below) that "noneof the conclusions would be altered if the tax were fixed in realterms". Output is independent of economic considerations (determined bythe "caprice of nature"). A fixed money supply is given, as is a desireto hold a certain real wealth balance relative to real income andconsumption. Speculation on the basis of expectations of price changesis assumed away. The non-agricultural sector holds its real wealth onlyin the form of money, while the agricultural sector holds both money andhoards of foodgrains. While Porter grants that we know almost nothingabout "what causes changes (and by how much) in the relative proportionsof foodgrain stocks and money in rural wealth balances", his analysisrests entirely on presumed changes in this fraction. As he indicates,with an unchanging fiaction, monetary policy is successful inmaintaining a certain price level.