AEB 6571 Econometric Methods I
Assignment 11  2010
Charles B. Moss
November 19, 2010
1. According to economic theory, farmland values are determined by a number of
factors. The most frequently cited model for farmland values is based on the
income capitalization formula
V
t
=
∞
i
=1
E [
CF
t
+
i

Ω
t
]
i
j
=0
(1 +
r
j
)
(1)
where
V
t
is value of farmland, E [
CF
t
i

Ω
t
] is the expected value of cash ﬂows
from farmland given information available at time
t
, and
r
t
is the interest rate
for agriculture. Under certain assumptions, Equation
1 can be reexpressed as
V
t
=
CF
t
r
t
.
(2)
Following the standard approach, we can take the natural logarithm of Equa
tion
2 to yield
ln (
V
t
) =
α
0
+
α
1
ln (
CF
t
) +
α
2
ln (
r
t
) +
t
(3)
Estimate Equation
3 using ordinary least squares and compute the variance
matrix using the matrix operations in R.
2. The decline in the housing market has caused some uneasiness from agricultural
lenders. In several regions of the country including Florida, a significant portion
of farmland values may be due to the eventual conversion of farmland into urban
1
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uses. Hence, some fear that the recent decline in house prices have impaired the
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 Spring '10
 Staff
 Regression Analysis, Natural logarithm, Covariance matrix, farmland values

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