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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

Author Info

Listed author(s):
  • Rodney Ramcharan
  • Raghuram G. Rajan

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 Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-62.

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Date of creation: 2012
Handle: RePEc:fip:fedgfe:2012-62
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Find related papers by JEL classification:
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
  • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
  • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
  • N52 - Economic History - - Agriculture, Natural Resources, Environment and Extractive Industries - - - U.S.; Canada: 1913-
  • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
  • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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Cited by:

  1. Steinar Holden, 2012. "Implications of insights from behavioral economics for macroeconomic models," Working Paper 2012/12, Norges Bank.
  2. Sam Langfield & Marco Pagano, 2016. "Bank bias in Europe: effects on systemic risk and growth," Economic Policy, CEPR;CES;MSH, vol. 31(85), pages 51-106.
  3. Anthony A. DeFusco & Charles G. Nathanson & Eric Zwick, 2017. "Speculative Dynamics of Prices and Volume," NBER Working Papers 23449, National Bureau of Economic Research, Inc.
  4. Rodney Ramcharan & Stéphane Verani & Skander J. Van Den Heuvel, 2016. "From Wall Street to Main Street: The Impact of the Financial Crisis on Consumer Credit Supply," Journal of Finance, American Finance Association, vol. 71(3), pages 1323-1356, 06.
  5. Jeremy G. Weber & Nigel Key, 2014. "Do Wealth Gains from Land Appreciation Cause Farmers to Expand Acreage or Buy Land?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 96(5), pages 1334-1348.
  6. Acharya, Viral & Naqvi, Hassan, 2012. "The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle," Journal of Financial Economics, Elsevier, vol. 106(2), pages 349-366.
  7. Rajan, Raghuram & Ramcharan, Rodney, 2016. "Local financial capacity and asset values: Evidence from bank failures," Journal of Financial Economics, Elsevier, vol. 120(2), pages 229-251.
  8. Henderson, Jason & Kauffman, Nathan, 2013. "Farm investment and leverage cycles: will this time be different?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 89-114.
  9. Claudio Borio & Magdalena Erdem & Andrew Filardo & Boris Hofmann, 2015. "The costs of deflations: a historical perspective," BIS Quarterly Review, Bank for International Settlements, March.
  10. Ehsan U. Choudhri & Lawrence L. Schembri, 2013. "A Tale of Two Countries and Two Booms, Canada and the United States in the 1920s and the 2000s: The Roles of Monetary and Financial Stability Policies," Working Paper Series 44_13, The Rimini Centre for Economic Analysis.
  11. Carola Moreno & Carlos Saavedra & Bárbara Ulloa, 2014. "Commodity Price Cycles and Financial Stability," Working Papers Central Bank of Chile 738, Central Bank of Chile.
  12. KURASHIMA Daichi & MIZUNAGA Masashi & ODAKI Kazuhiko & WATANABE Wako, 2013. "Is Leverage a Determinant of Asset Price? Evidence from real estate transaction data," Discussion papers 13082, Research Institute of Economy, Trade and Industry (RIETI).

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