Monetary policy and agricultural lending by private sector financial institutions

Abstract

Over a decade ago the Committee of Inquiry into Lending to Farmers (1972:19) reported that the evidence submitted to us indicated that there has been reasonable availability of loan finance for creditworthy borrowers. In the mid 1970s Bayliss and Bayley (1975:6) concluded that farmers borrowing requirements have been well catered for by financial institutions. More recently; respondents to a survey of farmer opinion (Pryde and McCartin, 1983) did not regard availability of finance as an important factor limiting expansion of farm output. Although the cost of finance was regarded as the chief limiting factor its availability was ranked ninth out of twenty possible limiting factors. It is the purpose of this Discussion Paper to report results of a preliminary investigation into relationships between monetary policy and lending to the agricultural sector by private sector financial institutions in New Zealand. Specifically, the objective of the study was to test the hypothesis that private sector financial institutions do not alter their portfolio compositions at the margin when the monetary policy stance becomes more restrictive. If the empirical results suggest that the hypothesis is true it could be tentatively concluded that changes to a more restrictive monetary policy stance are not biased in favour of, or against, agriculture in the sense that this sector bears a lesser or greater than proportional burden of any change in total loans outstanding.