Publication Type

Journal Article

Version

Preprint

Publication Date

2-2018

Abstract

This paper shows that a negative shock to agricultural productivity may increase food prices, and labor and capital can move away from manufacturing into agriculture to meet the subsistence requirement for food. This effect depends on income levels and openness to trade. Using annual manufacturing data and rainfall shocks as the instrument for crop yields (proxy for agricultural productivity), I find that an exogenous decline in yield decreases manufacturing output as well as employment and capital investment in manufacturing. Overall, crop yield variation can explain up to 44% of industrial output fluctuations in developing countries (rainfall shocks cause 31% of the fluctuations). Lastly, this paper shows that such perverse phenomena, in which resources move toward the sector with declining productivity, can lead to a significant reduction in aggregate productivity.

Keywords

Two-sector general equilibrium models, economic fluctuations, volatility, instrumental variable analysis, agricultural productivity

Discipline

Agricultural and Resource Economics | Economics

Research Areas

Macroeconomics

Publication

European Economic Review

Volume

102

First Page

240

Last Page

279

ISSN

0014-2921

Identifier

10.1016/j.euroecorev.2017.10.024

Publisher

Elsevier

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

https://doi.org/10.1016/j.euroecorev.2017.10.024

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