Fads versus fundamentals in farmland prices

We develop an approach to decompose farmland price time series into three uncorrelated components: permanent fundamental component, temporary fundamental component, and nonfundamental component. This decomposition is useful for studying the importance of fundamental versus nonfundamental factors in explaining farmland price behavior and the dynamic response of farmland prices to shocks to each of these components. The approach is applied to annual Iowa farmland prices over the 1922-94 sample period. We find that fads and overreactions play important roles in explaining short-run price behavior, while long-run price movements are explainable by permanent fundamental shocks.