Macroeconomic Determinants of Relative Wheat Prices: Integrating the Short Run and Long Run

Prior empirical studies ignore that markets, subject to overshooting, determine farm prices and macroeconomic variables jointly. So, these elasticities are statistically unreliable. Using cointegration, with all variables determined simultaneously, we find that instantaneous wheat price elasticities with respect to the real exchange rate and interest rate are -127 and -197, respectively. Here, we measure the amount that the wheat price overshoots its equilibrium. The extent of overshooting differs for different monetary policy regimes. However, 57 percent of the deviation from longrun equilibrium is corrected within two quarters.