Dynamic relationships between commodity prices and local housing market: evidence for linear and nonlinear causality

Abstract

ABSTRACT This research examines the relationship between agricultural commodity prices and the local housing market. Previous literature focuses on the unidirectional impacts from commodity prices to the local economy, but we propose that in some cases local asset markets can also influence commodity prices due to the agglomeration of commodity productions and the linkages of financial markets, and thus the causalities between them can be bilateral. In addition, according to a new regional economic model that we develop about local asset market and commodity price shocks, we further predict the causalities between the commodity prices and the local house price are nonlinear. We test these hypotheses using data of the major agricultural commodities of an agriculturally focused region – California Central Valley area. The results are consistent with our expectations: there is no evidence for linear causalities between the price returns of these agricultural commodities and the local housing market, but the nonlinear Granger causalities between them are significant.