This thesis is an empirical investigation into the behaviour of regional unemployment, wages and prices for the UK economy over the period 1974-1996. It develops a measure for regional retail prices and regional retail price expectations with which to examine regional price behaviour and to develop a further understanding of the labour market adjustment processes that occur at the regional level. Using regional prices and regional price expectations this thesis produces results which demonstrates a greater consistency with the predictions of regional wage determination models than either aggregate real wage modelling or the use of aggregate prices. The analysis of regional labour markets is developed alongside the dramatic change in regional unemployment relativities that occurred in the UK over the early 1990s and finds support for a clear north-south differential in regional real wage-adjustment processes consistent with contemporary models of wage determination. It is argued that the change in regional unemployment differentials was due to a combination of region-specific price expectational errors and the asymmetric impact of the economic shock. The narrowing of regional unemployment differentials occurred because real wage adjustment was slower in the south than in the north. This thesis suggests that regional price expectations can be modelled as a function of the perceived regional economic climate. Due to the incidence of region-specific shocks and regional asymmetries in the response to such economic shocks, it is argued that aggregate modelling of the UK labour market leads to spurious results on estimated labour market relationships unless regional differences are explicitly modelled. It is argued that regional labour market modelling needs to incorporate a measure of regional prices with which to model the underlying processes.

Essay 1: Expectation-Driven House Prices, Debt Default and Inflation Dynamics We contribute to the literature on dynamic stochastic general equilibrium (DSGE) models with housing collateral by including shocks to house price expectations. We also incorporate endogenous mortgage defaults that are rarely included in DSGE models with housing collateral. We use this model to study the effects of variations in house price expectations on macroeconomic dynamics and their implications for monetary policy. Model simulations show that an increase in expected future house prices leads to a decline in mortgage default rate and interest rates on household and business loans, whereas it leads to an increase in house prices, housing demand, household debt, business debt, bank leverage ratio and economic activity. In contrast to previous studies, we find that inflation is low during a house price boom. Finally, we show that monetary policy that takes into account household credit growth reduces the volatility of output and dampens a rise in housing demand, household debt and bank leverage ratio that enhances financial stability. However, a central bank that reacts to household credit growth increases the volatility of inflation. / Essay 2: House Price Expectations, Boom-Bust Cycles and Implications for Monetary Policy This essay examines the role of household expectations about future house prices and their implications for boom-bust cycles and monetary policy. Our findings are as follows. First, waves of optimism and pessimism about future house prices generate boom-bust cycles in house prices, financial activities (household debt, business debt, bank leverage, interest rates on household and business loans) and the real economy (housing demand, consumption, employment, investment and output). Second, we find that inflation declines during a house price boom and increases during a house price burst. Third, we find that monetary policy that reacts to household credit growth reduces the magnitude of boom-bust cycles and improves household welfare. Fourth, we find that the case for taking into account household credit growth becomes stronger in an economy in which the bank capital to asset ratio requirement is low, interest rates on loans and deposits adjust immediately to changes in the policy rate, or the household sector is highly indebted. / Essay 3: Credit Disruptions and the Spillover Effects between the Household and Business Sectors This essay examines the effects of credit supply disruptions in a New Keynesian DSGE model with housing collateral and working capital channels. A tightening of business credit conditions creates negative spillovers from the business sector to the household sector through labor income and housing collateral channels. A tightening of household credit conditions has negative spillover effects on the business sector via the housing collateral channel. We find that spillovers are more sensitive to changes in leverage where the shock occurs. A negative business credit shock creates upward pressure on inflation, whereas a negative household credit shock creates downward pressure on inflation. The working capital channel magnifies the response of inflation to a business credit shock, whereas it dampens the response of inflation to a household credit shock.

This thesis examines the relationship between price expectations and current consumption. Especially, whether the postponement of final consumption expenditure by households, as a result of their declining price expectations; which may be a deflatively-recessive spiral starter; coincides with economic theory and practice. Based on this, appropriate economic policy recommendations can be drawn. The analysis in the framework of intertemporal consumer model of two periods extended by inflation and the risk confirms this hypothesis. Price expectations positively affect current consumption through the intertemporal substitution effect of real interest rate changes. However, certain assumptions must be fulfilled. Especially, the economy must be in a fixed nominal interest rate environment, the substitution effect must not be offset by the effect of a change in the expected real disposable income or the income effect of the change in the real interest rate and the households must have a higher disposable income so that they can afford to postpone consumption. These findings coincide with the conclusions of the empirical analyzes mentioned in this thesis.

Common critique of the Austrian business cycle theory states that the Austrian cycle could not be initiated under the rational expectations hypothesis. This thesis therefore investigates the role of price expectations of entrepreneurs in the Austrian cycle theory. We conclude that this theory might be compatible with rational expectations only under several assumptions. The rational expectations hypothesis is, however, evaluated rather critically concluding it is quite strong and unrealistic assumption. Various regimes of monetary policy are discusses in the context of price expectations.

<p>     Farmers face significant uncertainty, like weather and prices. Micro-economic theory tells us that when facing uncertainty, an agent, or farmer, makes economic decisions based upon their expectations. This primitive is important for agricultural economics. The “classic” agricultural economic problems: acreage allocation, commodity storage, technology adoption, household labor engagement, etc., are all influenced by the expectations of farmers. Despite expectations pervasive inclusion in economic theory and the decades of attention from agricultural economists, we still know relatively little about how farmers form expectations. This Dissertation is aimed at this opportunity.</p> <p>     The first chapter estimates the degree to which information is incorporated in farmland value expectations. Theoretically, an agent’s expectation should represent all available information. However, there are reasons to believe that an agent may not possess all the pertinent information or they may not be able to interpret the information. Macroeconomists have developed two models to explain the degree to which information may not be incorporated into expectations, The Sticky and Noisy Information Models. I use expectations and actual values of Iowa farmland from 1964 to 2021 to estimate the degree to which new information is not reflected in expectations, or exhibit information rigidities. I find that Iowa farmland market participants do experience information rigidities. From a practical standpoint, farmland is farmers’ most important collateral, the presence of public, simple farmland information may help mitigate lending challenges as a result of farmland value expectations.</p> <p>     The second chapter addresses how commodity price information is incorporated into the financial expectations of farmers. I estimate how unknown or surprise information from a United States Department of Agriculture (USDA) report changes farmers’ attitudes and expectations of their financial conditions. This chapter, synthesizes literature from macroeconomics and commodity price analysis, and uses a unique source of data, the Purdue University/CME Group Ag Economy Barometer. The Ag Economy Barometer reflects the aggregate sentiment of farmers across the US. Like the consumer sentiment index from the University of Michigan, the Ag Economy Barometer can provide a snapshot of sentiment, a measure outside of fundamental economic indicators. Using the corn ending stocks values from the USDA World Agricultural Supply and Demand Estimates (WASDE), I find that</p> <p>farmers’ short– and long–term expectations and attitudes toward large farm investments are increased by information implying a higher corn price. However, this relationship does not exist in the reverse direction and when corn is not actively growing. As a result, if farmers are acting on these changes in expectations, they may be engaging in suboptimal decision making.</p> <p>     The third and final chapter explores the degree to which previous experience is reflected in expectations. The tales of the financial hardship during 1980’s Farm Financial Crisis have been shared across farmers’ dining room tables for decades. The most prominent anecdote relates to the rapid decline in farmland prices. As mentioned in the first chapter, the asset value of farmland is important to farmers. As a result, if experiences like the 1980’s Farm Financial Crisis have created a downward bias toward farmland values, the asset may be undervalued and frictions may exist in the farmland lending market. Macroeconomists show that consumers’ inflation expectations are directly related to their life experiences. I use a panel of farmland market participants in the Purdue Land Value and Cash Rent Survey to estimate the effect of previous experience on farmland value expectations. I find no</p> <p>significant effects. However, my estimates are using variation in cross sectional data. This modeling choice does not rule out the potential of the Farm Financial Crisis effecting all market participants in a similar way, a question outside of my analysis.</p> <p>     Each chapter of this Dissertation addresses how an agent forms their expectations, a necessary first step in my journey as a researcher. I am interested in the link between expectations and economic outcomes. I have built considerable knowledge on expectation formation and will deploy this knowledge exploring the role of expectations in farm outcomes, like acreage allocation, commodity storage, technology adoption, and household labor engagement. In my next step as a researcher, I plan to use the current theoretical advancements in behavioral economics, the explosion in empirical methods and computing, and the availability of data to re-visit the role of expectations in “classic” farm economics problems.</p>