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Abstract

Implications of real cash balances as a productive input in agricultural production are explored. A system of aggregate input demand functions for agriculture including real cash balances is formulated and estimated, assuming that producers minimize input costs for a given output level. Empirical results suggest real cash balances are an important contributor to agricultural production. Their exclusion from production studies may lead to serious specification biases. Tests herein indicate that the demand for cash balances is relatively inelastic with respect to changes in the user cost of money and that real cash balances are a substitute for machinery and capital.

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