The Dangers of Monetary Policy in Agrarian Economies: A Rejoinder

Professors Patrick and Chandler have shown, carefully andcorrectly, that my analysis depends critically upon a particularassumption. Despite their vehement disagreement with thisassumption—that farmers will hold a larger part of their wealth infoodgrains when the alternative is to convert those grains into money atdeclining prices- -I still believe in its realism and am grateful forthe opportunity to elaborate its defence: 1) Farmers tend to beoptimistic about future prices and outputs; the strain of existencemight be unendurable without this optimism. The result is that highprices are quickly seized upon by farmers as normal prices. 2) Farmershave short memories and treat recent prices as expected future prices.For example, agricultural supply studies in Pakistan show that the useof several lagged prices fails to improve regressions; just last year'sprice is sufficient to explain almost the entirety of any response toprice1, 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.