MONETARY FACTORS and the U.S. RETAIL FOOD PRICE LEVEL

The following study assesses whether an economic relationship exists between the money supply (i.e. M2), interest rates, and the exchange rate and the retail food price level in the United States. Data for the M2 classification of the United States money supply, the Effective Federals Funds (interest) Rate, and the United States Trade Weighted Exchange Index: Major Currencies for the period from January 1974 through December 2007 are evaluated as they relate to the United States Consumer Price Index for all Urban Consumers: Food for the same period. The statistical analysis involves an examination of the autocorrelation and partial autocorrelation functions of each variable, a test for the presence of stationarity in each variable(Augmented Dickey-Fuller test), Johansen’s test for co-integrating equations of the variables considered, Granger’s test for causality, and finally an estimation of regression models of United States retail food prices as a function of the money supply, interest rates, and exchange rates. Results indicate that a statistically significant relationship exists among the variables tested. A causal relationship exists between the Federal Funds Rate and the money supply, the money supply and the retail level of food prices, and also between the exchange rate and the retail level of food prices. The implications of the results are assessed through the lens of agricultural producers and processors, investors, lenders, consumers, and monetary and agricultural policymakers. Keywords: retail food prices, money supply, Federal Funds Rate, exchange rate, augmented Dickey-Fuller, Johansen’s test for co-integration, Granger causality