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The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s

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  • Raghuram Rajan
  • Rodney Ramcharan

Abstract

Does credit availability exacerbate asset price inflation? What channels could it work through? What are the long run consequences? In this paper we address these questions by examining the farm land price boom (and bust) in the United States that preceded the Great Depression. We find that credit availability likely had a direct effect on inflating land prices. Credit availability may have also amplified the relationship between the perceived improvement in fundamentals and land prices. When the perceived fundamentals soured, however, areas with higher ex ante credit availability suffered a greater fall in land prices, and experienced higher bank failure rates. Land prices stayed low for a number of decades after the bust in areas that had higher credit availability, suggesting that the effects of booms and busts induced by credit availability might be persistent. We draw lessons for regulatory policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18027.

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Date of creation: Apr 2012
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Handle: RePEc:nbr:nberwo:18027

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  1. Hong, Harrison & Stein, Jeremy, 2007. "Disagreement and the Stock Market," Scholarly Articles 2894690, Harvard University Department of Economics.
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Cited by:
  1. Holden, Steinar, 2012. "Implications of Insights from Behavioral Economics for Macroeconomic Models," Memorandum 25/2012, Oslo University, Department of Economics.
  2. Acharya, Viral V & Naqvi, Hassan, 2012. "The Seeds of a Crisis: A Theory of Bank Liquidity and Risk-Taking over the Business Cycle," CEPR Discussion Papers 8851, C.E.P.R. Discussion Papers.
  3. Rodney Ramcharan & Skander Van den Heuvel & Stephane Verani, 2013. "From Wall Street to main street: the impact of the financial crisis on consumer credit supply," Finance and Economics Discussion Series 2013-10, Board of Governors of the Federal Reserve System (U.S.).

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