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Abstract

Farmland prices in the United States more than doubled in real terms over the twenty years 1960 to 1980. Two suggested possible causes of this growth are (i) growth of rental income to land, and (ii) inflation. Theoretically, the effect of inflation is ambiguous. The empirical work uses data for eight midwestern states of the United States. Most of the growth in U.S. farmland prices is accounted for by growth of rental income. In a regression model, inflation has a negative effect on real land prices; but the effect is comparatively small. This result is consistent with the Darby hypothesis about the effect of inflation on interest rates. It implies land is not a good 'hedge' against inflation in general, although it was during the 1970s. Real growth in farmland prices has not been confined to the United States. The Factor Price Equalization Theorem suggests a tendency towards equalization of land rental income between different regions of a country and between countries. This Theorem rests on strong assumptions. If interest rates were equalized along with land rents, land prices would be equalized as well. The main empirical problems are to convert acres of land and currencies to comparable units. To control for differences in land quality, growth rates rather than levels of land prices are compared between states of the United States, and between the United States, Canada, Australia, and New Zealand. Two types of currency conversions are used: market exchange rates and a notional purchasing power parity exchange rate, the ratio of Consumer Price Indexes between countries. For the measures based on market exchange rates, the growth rates of land prices were very similar among the four countries over the intervals, 1961 to 1980 and 1968 to 1980. There were no statistically significant differences. For the measures based on the notional exchange rate, the rankings of countries--according to growth rates of land prices--changed markedly and there were some significant differences. These results indicate departures from purchasing power parity and changes in real exchange rates during the sample period. Overall, the results support the Factor Price Equalization Theorem.

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