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Abstract

Coffee and cocoa are two agricultural commodities produced mainly in developing countries and exported almost entirely to high income industrialized countries. The international market for these products is marked by high price instability. This paper investigates whether monetary policy disturbances contribute to cocoa and coffee price instability. Monthly time series data were collected for five variables including agricultural prices, industrial prices, money supply, exchange rate, and interest rate. A Vector Error Correction model is used to investigate whether cocoa and coffee prices overshoot in response to unanticipated monetary shock. The econometric evidence points toward overshooting of cocoa, arabica coffee and robusta coffee prices in the short-run when money is not neutral. When the assumption of long-run neutrality is imposing the imported commodity price still move more quickly back to their equilibrium level than manufactured good price but their overshooting coefficients are not significant.

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