Passing the Buck: Impacts of Commodity Price Shocks on Rural Outcomes

Producers of agricultural commodities treat world commodity prices as exogenous. Prices facing regional producers can also be considered exogenous when we aggregate producers over small districts, and even across New Zealand. Through estimation of a vector autoregressive (VAR) model, under a minimal set of restrictions and through institutional knowledge, we estimate the causal impact of exogenous commodity price innovations on a set of community outcomes. We find the conventional approach of restricting the focus to national effects is insufficient to understand such dynamics, and future analysis and policy should consider sub-national responses. By extending the framework to a VAR on panel data covering all, or a sub-sample, of New Zealand TLSs over 1991-2011, we find that an increase in commodity prices leads to a permanent increase in housing investment and house prices across the country. However there is a significant degree of spatial distribution in effects. Contrary to our hypothesis, we find that rural communities are in fact the most insulated from commodity price shocks, with small and insignificant effects in both outcomes. Instead, due to constrained short-run rural employment and indirect redistribution through increased expenditure, it is urban areas that experience the most significant increases in housing investment, and the lion’s share of house price appreciation.

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 Record created 2017-04-01, last modified 2020-10-28

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