Money Supply,Relative Agricultural Prices And The Income Gap Between Rural And Urban Areas

It is unusual to see that the ratio of the residents’income of urban and rural districts is over2in most countries, but the situation is totally different in China. Through the investigation of urban residents disposable income and net income of rural residents in China during the years between1978and2012, this research finds the ratios from1982to1985are all under2, but other years’ are on the contrary. Especially from2007to2010, the ratios of these three years even reach3. The key point in this income gap problem should be the famers’. As known, the relative prices of agricultural products are closely correlated with the farmers’ income, so a lot of scholars have advocated to improve the agricultural prices, issue policies to increase farmers’ income. In fact, most of these researchers did not study the exact relationship between the agricultural prices and the rural-urban income gap, but only explain the situation in a qualitative way. In addition, the money supply changes are closely related to the fluctuations of the relative agricultural prices and played different roles between urban and rural areas. On the basis of related theories and the time series data of1978-2012, this paper emphasis on studying the interactions during money supply, relative agricultural prices and the income gap between urban and rural areas by using qualitative and quantitative methods. The main contents include:(1) analyzes related theories;(2) uses descriptive statistics methods to explain the corrections of money supply, relative agricultural prices and the income gap between urban and rural areas;(3) taking advantage of quantitative analysis methods, examines interactions of money supply, relative agricultural prices and the income gap between urban and rural areas;(4) combining previous researches and analyses in this paper, puts forward some policy Suggestions on narrowing the income gap between urban and rural areas in China.A. The conclusions of this paper:a. The relative agricultural prices have a significantly negative correlation with the income gap between urban and rural areas. China’s money supply, relative agricultural prices keep a long-term equilibrium relationship with the income gap between urban and rural areas. Moreover, the regression coefficient of the relative agricultural prices is negative in the cointegration equation. This indicates that the increase of the relative agricultural prices is helpful to narrow the income gap between urban and rural areas in the long term. Specifically, the value is0.999, it means that the gap between urban and rural areas can be averagely narrowed by0.999%with every1%increase in the relative agricultural prices.b. The money supply has a significantly positive correlation with the income gap between urban and rural areas. China’s money supply, relative agricultural prices keep a long-term equilibrium relationship with the income gap between urban and rural areas. Moreover, the regression coefficient of the money supply is positive in the cointegration equation. This indicates that the increase of the money supply is one of the factors to make the income gap between urban and rural areas become more expanding in the long term. Specifically, the value is0.167, it means that the gap between urban and rural areas can be averagely widened by0.167%with every1%increase in the money supply.c. The money supply effectively regulates the income gap between urban and rural areas through changing the relative agricultural prices in the short term. The Granger causality test results show that the money supply is the Granger cause of the change of the relative agricultural prices, the relative agricultural prices is the Granger cause of the change of the income gap between urban and rural areas, the money supply is the Granger cause of the change of the relative agricultural prices. With the impulse response function analysis, it finds that the money supply effectively regulates the income gap between urban and rural areas through changing the relative agricultural prices in the short term of1to5years. On the one hand, the increase of money supply raises the relative agricultural prices, then makes the income gap between urban and rural areas become more narrow; On the other hand, the increase of money supply reduces the relative agricultural prices, then makes the income gap between urban and rural areas become wider. Because of the price effect is offset by the changes of other economic factors, this conclusion is no more right in the long term, the increase of money supply only widen the income gap between urban and rural areas.d. The adjustment of the relative agricultural prices plays an important role in the change of the income gap between urban and rural areas. Variance decomposition results indicate that the relative agricultural prices have had a huge impact on the income gap between urban and rural areas relying on the high contribution rate of35%in the third period. In contrast, the money supply shock just explains as much as0.48%of the change in the income gap between urban and rural areas.B. Policy suggestions:a. Establish a scientific and effective market price formation mechanism of agricultural products to eliminate the obstacles of agricultural prices improvement. Relatively low agricultural prices is the main reason why the income gap between urban and rural areas has been keeping wide in China. Therefore, the key to narrow the income gap between urban and rural areas is to improve the relative agricultural prices. This paper argues that the establishment of a scientific and effective agricultural products market price formation mechanism will play the most important role in eliminating the obstacles of agricultural prices improvement. Firstly, setting up and improving the national market pricing mechanism to accelerate the process of agricultural marketization. It makes agricultural products quickly and efficiently circulate among the markets of different functions and provides more choices for sales by establishing trade markets, wholesale markets and futures markets related to agricultural products. Secondly, in order to make price forming mechanism more fair, it has to innovate the market transaction pricing approach of agricultural products. This not only reduce the labor costs and improve the efficiency, but also make artificial factor was left out of the pricing system. In addition, it is essential to establish agricultural products trading facilities such as cold storage, warehouse and transportation facilities.b. Break the dual economic structure to eliminate the effect differences of monetary policy between urban and rural areas. The income gap between urban and rural areas will be expanded by the increase of the money supply. This paper argues that this situation stems from China’s urban and rural dual economic structure. The study conclusion from Gurmar Myrdal (1974) shows that "free market forces make it become an inner trend to develop the economy to the direction of regional imbalance ", that is to say, even if there is no policy guidance, the spontaneous polarization effect from marketization will lead the urban areas to develop better. Therefore, the implementation of unified monetary policy can produce different effect once the dual economic structure formed. For solving the problem of the dual economic structure in China, there are three main measures:(1) improves the human capital level of agricultural labor force.(2) speeding up the reform of the household registration system. In place of taking split household registration system between urban and rural areas, the reform should turn it into a pure population registration system.(3) reforms the rural financial system, especially in promoting the restructure and form of agricultural cooperative bank and post bank.c Apply prudent monetary policy to keep stable agricultural prices. The conclusion indicates that the relative agricultural prices occurs frequent fluctuation in the case of the money supply shocks on the one hand, and there is some uncertainty about the wave direction in the short term; on the other hand, despite the increase in the money supply in the short term can improve the income gap between urban and rural areas through the adjustment of the relative agricultural prices, in the long run, is unhelpful to alleviate the problem. Therefore, no matter from the price level, or the distribution of income, it is necessary to implement relatively prudent or even tightening monetary policy. In addition, it is indispensable to build corresponding smooth and hedge mechanism to prevent the farmers’ interests from damaged due to frequent fluctuations of agricultural prices. Specifically, encouraging the transform of agricultural production to the industrialization because the large industrialized production has a higher resist ability to defend the market price fluctuations. In addition, the government should establish a more efficient and flexible grain reserves policy to realize the hedge when there occurs volatility in agricultural prices.