Capital market in agriculture : a disaggregated structural model

Abstract

The objective of this study was to develop an econometric simulation model of the U.S. financial sector that emphasizes the linkages between the financial sector and the farm sector. Demand and supply equations for eight financial assets disaggregated by investor group and six debt categories disaggregated by purpose and, in the case of the farm sector, lender are estimated using ordinary least squares and simulated in a dynamic, linear, deterministic framework. This model was then used to investigate the impacts of two alternative methods of financing an increase in the deficit on the farm sector: (1) public financing of the deficit and (2) monetization of the deficit by the Federal Reserve. Public financing of an increase in the deficit lead to higher real interest rates, a decline in total farm debt (indicating public financing of the deficit "crowded out" investment in the farm sector) and in financial assets held by farm operator families. Monetization of an increase in the deficit caused real interest rates to fall in the short-run, farm debt to increase and financial asset holdings of farm operator families to decline. Disaggregation of farm debt by lender showed that the change in total farm debt under this scenario was not equally distributed across all lenders. Monetization of an increase in the deficit benefited the Farm Credit System over depository institutions. Public financing of an increase in the deficit benefited depository institutions over the Farm Credit System. The model developed in this study provides a more detailed investigation of the impacts of macroeconomic policies on the farm financial sector than previously existed. The results of the estimation and simulation indicate that the model is stable and provides an accurate representation of the financial economy both within and beyond the sample time period.