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Modeling Nonlinearities in Farmland Values: A Dynamic Panel Threshold Error-Correction Model

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  • Onel, Gulcan

Abstract

Earlier studies usually indicate that farmland prices and cash rents are not cointegrated, a finding that seems at odds with the implications of the present value model. The main objective of this study is to explore whether this absence of empirical support for the present value model can be attributed to the restrictiveness of conventional time series methods. I suggest a panel unit root model with two regimes in which the adjustment process may be characterized by the presence of thresholds and discontinuities reflecting the presence of transactions costs and other barriers to adjustment. Using farmland value and cash rents data for 10 agricultural states of the U.S. between 1960 and 2008, empirical findings give modest improvement over the linear unit root process. It is suggested that there might be a bias caused by cross sectional dependence and an inadequate time span of the data.

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Paper provided by Agricultural and Applied Economics Association in its series 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin with number 49445.

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Date of creation: 30 Apr 2009
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Handle: RePEc:ags:aaea09:49445

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Keywords: Present Value Model; Transactions costs; Thresholds; Panel unit root; Land Economics/Use; Research Methods/ Statistical Methods;

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  1. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  2. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  3. Kaddour Hadri, 1999. "Testing For Stationarity In Heterogeneous Panel Data," Research Papers 1999_04, University of Liverpool Management School.
  4. Bruce E. Hansen & Mehmet Caner, 1997. "Threshold Autoregressions with a Unit Root," Boston College Working Papers in Economics 381, Boston College Department of Economics.
  5. Fontnouvelle, P. de & Lence, Sergio H., 2002. "Transaction Costs and the Present Value," Staff General Research Papers 5263, Iowa State University, Department of Economics.
  6. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
  7. Falk, Barry L., 1991. "Formally Testing the Present Value Model of Farmland Prices," Staff General Research Papers 11093, Iowa State University, Department of Economics.
  8. Luciano Gutierrez & Joakim Westerlund & Kenneth Erickson, 2007. "Farmland prices, structural breaks and panel data," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 34(2), pages 161-179, June.
  9. Bohl, Martin T. & Siklos, Pierre L., 2004. "The present value model of U.S. stock prices redux: a new testing strategy and some evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(2), pages 208-223, May.
  10. Tom Engsted, 1998. "Do farmland prices reflect rationally expected future rents?," Applied Economics Letters, Taylor & Francis Journals, vol. 5(2), pages 75-79.
  11. Jean-Paul Chavas & Alban Thomas, 1999. "A Dynamic Analysis of Land Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 772-784.
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