The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s
Raghuram Rajan, Rodney Ramcharan
American Economic Review · 2015 · Volume 105 · Issue 4
Abstract
Does credit availability exacerbate asset price inflation? Are there long run consequences? During the farm land price boom and bust before the Great Depression, we find that credit availability directly inflated land prices. Credit also amplified the relationship between positive fundamentals and land prices, leading to greater indebtedness. When fundamentals soured, areas with higher credit availability suffered a greater fall in land prices and had more bank failures. Land prices and credit availability also remained disproportionately low for decades in these areas, suggesting that leverage might render temporary credit induced booms and busts persistent. We draw lessons for regulatory policy. (JEL E31, G21, G28, N22, N52, Q12, Q14)
Keywords
Price Level, Inflation, Deflation, Banks, Depository Institutions, Micro Finance Institutions, Mortgages, Financial Institutions and Services: Government Policy and Regulation, Economic History: Financial Markets and Institutions: U.S., Canada: 1913-, Economic History: Agriculture, Natural Resources, Environment, and Extractive Industries: U.S., Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets, Agricultural Finance
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