Price dynamics in agriculture: An exercise in historical econometrics

The cobweb theorem links supply reacting to the lagged price to demand reacting to the current price. One can generalize this idea to a set of interdependent markets. Here this is done for eight agricultural product markets. The supply side is represented by an acreage allotment model, which describes the areas under cultivation for various crops in response to price expectations. The demand side is modelled as an inverse demand system. These two systems were estimated for historical data for Belgium in the early part of this century. They can be combined into a simulation model for the study of the endogenous dynamics. It turns out that this dynamics is strongly damped and that the dominant eigenvalue is negative.