Linkages from the farm sector to the Australian macroeconomy : towards a theoretical and empirical analysis

Abstract

The volatile fortunes of the Australian farm sector in recent years, and particularly the severe drought of 1982-83, has renewed interest, amongst policy makers and policy advisers, in the impact which developments in the farm sector may have on the macroeconomy. However, in the Australian literature, there are few detailed theoretical or empirical analyses of farm/macro linkages. Further, the existing Australian macroeconomic models do not provide a fully suitable framework for undertaking such an analysis. In view of these gaps or inadequacies in the existing literature, the objective of the present thesis is, firstly, to make a contribution towards the development of a macroeconomic model framework which is suitable for analysing the role of the farm sector in the Australian macroeconomy and, secondly, to undertake some of the associated analysis. To that end, a relatively large theoretical model is developed in which the linkages between the farm sector and the macroeconomy are emphasised. The model proves to be too large and complex to be tractable using strictly formal algebraic techniques. Therefore, in the first instance, the analysis is undertaken using a slightly less rigorous geometric characterisation of the model. After this geometric approach is fully exploited, some parts of the analysis are extended and refined using theoretical simulation techniques. A number of important results are established in these theoretical analyses. It is shown that, in principle, the marketing and institutional environment in which the farm sector operates is of major importance in influencing the macroeconomic implications of production and price shocks originating in the farm sector. It is also demonstrated that shocks to the volume of farm production or to farm prices may influence macroeconomic variables such as non-farm G.D.P., the interest rate and the state of the balance of payments in a direction which is at variance to that suggested by intuition or conventional wisdom. For example, an exogenous (drought induced) decline in farm production could have a beneficial impact on non-farm output and the state of the balance of payments. Alternatively, a drought which has a (more intuitive) adverse effect on the overall level of economic activity may place upward pressure on the interest rate. In a similar vein, an exogenous increase in the price of farm commodities on overseas markets may reduce domestic economic activity and worsen the balance of payments. Because of the time and resources required to develop and use a relatively large theoretical simulation model, it is not feasible, within the context of the thesis, to apply theoretical simulation techniques to each of the analyses which are undertaken less formally using the geometric characterisation of the model. However, the foundations are laid to permit the ready extension of the theoretical simulation technique to these remaining cases as part of a future research exercise. The existence of the theoretical simulation model and analyses should also facilitate the eventual development of an empirical version of the model. Given that some further post thesis research will be required in order to develop an empirical version of the full model structure, it was decided to seek some tentative and preliminary empirical results from a very simple empirical version of the model. A major conclusion to emerge from this empirical analysis is that the farm sector may not have declined in relative importance as a source of change in non~farm output over the period since the early 1950s and may even have increased in importance. Such a result serves to provide some additional motivation for persisting with the line of research commenced in the thesis.