Macroeconomic policy and farmland value: a dynamic, portfolio-balance approach

Alan Dean Barkema

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: An important factor in the financial adjustment affecting the agricultural sector of the U.S. economy during the 1980s is a substantial decline in the average real price of farmland. This study is an investigation of the existence and extent of relationships among macroeconomic policy, the real rate of interest, and the real price of farmland;Experiments performed with the dynamic, portfolio-balance model developed in this investigation suggest that an expansionary ficsal policy conducted in an environment of monetary restraint leads to (1) an increase in the real rate of interest, (2) a decline in returns to land, and (3) a decline in the real price of land. Empirical support for these hypotheses is found among relevant data series through the use of the techniques of data organization and observation known as vector autoregression;Specifically, analyses of post-World War II data indicate that money supply shocks tend to lower the real rate of interest and fiscal deficit shocks tend to raise the real rate of interest. An increase in the real rate of interest, in turn, tends to lower returns to land and the real price of land. Indeed, the empirical analyses indicate that the role of the real rate of interest in determining land value has been as significant as that of returns to land during the post-war period.

Date: 1986-01-01
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genstf:198601010800009054

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