Monetary Impacts and Overshooting of Agricultural Prices in a Transition Economy: The Case of Slovenia

The paper focus on the time adjustment paths of the exchange rate and agricultural producerand industrial prices in response to unanticipated monetary shocks following modeldeveloped by Saghaian et al. (2002). Results indicate that agricultural prices adjust faster thanindustrial prices to innovations in the money supply, affecting relative prices in the short run,but strict long-run money neutrality does not hold. The impulse response analysis shows thatan exogenous shock to the money supply has a significant and volatile effect on the threeprice variables. The extent of overshooting in agricultural prices is twice as large as forexchange rates or industrial prices. This indicates that in the case of monetary shocks thesectors associated with flexible changes bear the burden of adjustment vis-à-vis the sectorswith sticky changes.The exchange rate pass-through on agricultural producer prices revealedby the forecast error variance analysis indicates the relatively greater importance of theexchange rate than the money supply in explaining the expected variation of the agriculturalproducer price. This is consistent with floating exchange rate policy, while agricultural tradepolicy for sensitive products has been more restricted until Slovenia joined the EuropeanUnion.