Credit booms and financial instability in US agriculture

Abstract

PurposeThis study examines the relationship between economic fluctuations and financial distress in the US agricultural sector, which is associated with a large degree of financial instability.Design/methodology/approachThe authors developed a parsimonious model of economic fluctuations in the US agricultural sector. The authors used statistical filter methods to identify the co-movement in cyclical fluctuations in real, cumulative growth rates in farm real estate values, farm sector debt and leverage.FindingsThe proposed model closely approximated the financial evolution of the US agricultural sector between 1960 and 2018. In addition, the authors proved that the proposed model is an early warning indicator of farm loan delinquencies and farm bankruptcies.Originality/valueThis study exploits recent advances in economic theory and empirical macroeconomic modeling to develop a model that is a robust predictor of financial distress in the agricultural sector. Further, the authors demonstrate that the policy interventions following the 1980s farm financial crisis demonstrate the likely long-run economic response to the policies enacted following the 2008 financial crisis.