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Open Access Publications from the University of California

Alternative subsidy reduction paths: the role of fiscal and monetary policy linkages


In the case of U. S. agricultural policy, this paper shows how governmental intervention can be formally incorporated in a conditional-vector-error-correcting model. From the resulting theoretical framework and empirical analysis, formal hypotheses are tested regarding both forward and backward linkages among money, exchange rates, and agricultural and non-agricultural markets. Consistent with the current Uruguay Round of the GATT negotiations, a number of policy simulations are conducted with the constructed with the constructed empirical model. Phased reductions in the degree of subsidization in the U.S. agricultural sector are shown, through these policy simulations, to alter the feedback effects from money to prices as well as the dynamic path for exchange rates.

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