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The Present Value Model, Farmland Prices and Structural Breaks

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Author Info
Gutierrez, Luciano
Erickson, Kenneth
Westerlund, Joakim

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Abstract

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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Publisher Info
Paper provided by European Association of Agricultural Economists in its series 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark with number 24702.

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Date of creation: 2005
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Handle: RePEc:ags:eaae05:24702

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Keywords: farmland prices; present value model; non-stationary panel data analysis; regime shift; Q24; Land Economics/Use; C22; C23; G12;

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  6. Falk, Barry L., 2003. "Formally Testing the Present Value Model of Farmland Prices," Staff General Research Papers 11093, Iowa State University, Department of Economics.
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