Econometric Simulation Model for Analyzing the Use of Funds in Corn Belt Agriculture: An Application of Pure Random Coefficient Technique, An

R. Thamodaran, Earl O. Heady, Raymond J. Schatzer
April 1984  [84-WP 7]

The purpose of this study is to develop an econometric simulation model for analyzing the use of funds in Corn Belt agriculture. The Corn Belt Region, one of the major regions in U.S. agriculture, constitutes states such as Iowa, Illinois, Indiana, Missouri, and Ohio. A set of behavioral functions of the use funds in the region are specified to accomplish this task. Fixed expenditures, production expenditures, and land transfers are the major categories of the use of funds. Further, the behavioral equations are specified by a pure random coefficient technique and estimated by following Zellner's seemingly unrelated technique.

Based on the estimated behavioral functions and accounting identities, a simulation system of the use of funds is developed and an ex-post simulation is performed to test the validity of the model. To test its effectiveness, the model analyzes several farm policy alternatives on the use of funds, such as a 25 percent increase in prices paid indexes, a 50 percent increase in prices received indexes, and a 10 percent reduction in crop planted acres over the normal trend of these variables. An ex-ant simulation to the year 1995 is performed under the policy alternatives. Various farm financial indicators, such as production expenditures, fixed expenditures, farm debt, and credit demand are studies under these policy alternatives.

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