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Library The Present Value Model, Farmland Prices and Structural Breaks

The Present Value Model, Farmland Prices and Structural Breaks

The Present Value Model, Farmland Prices and Structural Breaks

Resource information

Date of publication
december 2005
Resource Language
ISBN / Resource ID
AGRIS:US2016201900

We review the constant discount rate present value model of farmland prices using non-stationary panel data analysis. We use panel unit root and cointegration analysis to test if the present value model holds for a sample of 31 U.S. States covering the period 1960-2000. Preliminary results indicate that farmland prices and cash rents are non-stationary and non-cointegrated assuming a constant discount rate. The absence of cointegration may be due to the presence of a regime shift representing a time-varying discount rate. To accommodate this possibility, we introduce new panel cointegration tests that allow for unknown regime shifts in the cointegration relationship. The results suggest that the cointegration hypothesis cannot be rejected if there is a regime shift. Thus, while the present value model of farmland prices must be rejected when the discount rate is presumed constant, it cannot be rejected once we allow for regime shifts representing a time-varying discount rate.

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Authors and Publishers

Author(s), editor(s), contributor(s)

Gutierrez, Luciano
Erickson, Kenneth W.
Westerlund, Joakim

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