THE EFFECT OF INFLATION ON CAPITAL FORMATION IN AGRICULTURE: A STUDY OF TRACTOR SALES IN THE U.S. (UNITED STATES)
Abstract
The major objective addressed by this research was to estimate the effect of inflation on tractor sales in U.S. agriculture. To attain this objective, two vector-autoregressive models of quarterly tractor sales were conceptualized and estimated. The first model included the inflation rate as an explicit variable. Additional variables in the model included: tractor sales, real income, and real annual cost of tractors. The second model also included four variables: tractor sales, real income, an index of real cash flow, and an index of implicit real rental price of tractors taking income taxes into account. The second model was conceptualized in order to estimate the specific effects of inflation through the variables affected by tax laws (depreciation shield, real after-tax interest rate, and investment tax credit) and through the effects on farm cash flows. For both models, the following statistical procedures were performed: (1) a causality test; (2) the impulse response of tractor sales to shocks in other variables; (3) a forecast error variance decomposition; and (4) a historical decomposition of variance. Results for the first model found that inflation was a significant variable explaining tractor sales for the period 1961Q3-1982Q2. However, tractor sales were found to be more sensitive to actual past changes in real annual cost and real income than to inflation. Results for the second model found a theoretically inconsistent causation (positive instead of negative) running from implicit rental price index to tractor sales. This result was a barrier to delineating the effect of inflation through tax laws. The real cash flow index (which increases with inflation) was the most important variable in explaining tractor sales for the above period. The study concluded that inflation had a negative effect on tractor sales during the period 1961Q3-1982Q2. The magnitude of these effects were smaller than those from real annual cost and real income. The particular negative effect of inflation through cash flow stress might be an important factor concerning capital formation in agriculture. The importance of the reduced value of the depreciation income-tax shield and lower real after-tax cost of capital as caused by inflation was not confirmed.
Degree
Ph.D.
Subject Area
Agricultural economics
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