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Commodity price movements in a general equilibrium model of storage

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  • David M. Arseneau
  • Sylvain Leduc

Abstract

We embed the canonical rational expectations competitive storage model into a general equilibrium framework thereby allowing the non-linear commodity price dynamics implied by the competitive storage model to interact with the broader macroeconomy. Our main result is that the endogenous movement in interest rates implied under general equilibrium enhances the effects of competitive storage on commodity prices. Compared to a model in which the real interest rate is fixed, we find that storage in general equilibrium leads to more persistence in commodity prices and somewhat lower volatility. Moreover, the frequency of stockouts is lower in general equilibrium. A key mechanism driving this result is a link between the ability of the household to smooth consumption over time and the level of storage in the stochasic equilibrium. Finally, the model is used to examine the macroeconomic effects of both biofuel subsidies for ethanol producers and, separately, subsidies designed to insulate households from high food prices.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1054.

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Date of creation: 2012
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Handle: RePEc:fip:fedgif:1054

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  1. Luca Guerrieri & Martin Bodenstein, 2012. "Oil Efficiency, Demand, and Prices: a Tale of Ups and Downs," 2012 Meeting Papers 25, Society for Economic Dynamics.
  2. Bruce A. Babcock, 2011. "The Impact of Ethanol and Ethanol Subsidies on Corn Prices: Revisiting History," Center for Agricultural and Rural Development (CARD) Publications 11-pb5, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  3. Sylvain Leduc & Keith Sill, 2001. "A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns," Working Papers 01-9, Federal Reserve Bank of Philadelphia.
  4. Julia K. Thomas, . "Is Lumpy Investment Relevant for the Business Cycle?," GSIA Working Papers 1998-E250, Carnegie Mellon University, Tepper School of Business.
  5. Cafiero, Carlo & Bobenrieth H., Eugenio S.A. & Bobenrieth H., Juan R.A. & Wright, Brian D., 2011. "The empirical relevance of the competitive storage model," Journal of Econometrics, Elsevier, vol. 162(1), pages 44-54, May.
  6. Serena Ng & Francisco Ruge-Murcia, 1997. "Explaining the Persistence of Commodity Prices," Boston College Working Papers in Economics 374, Boston College Department of Economics.
  7. Williams,Jeffrey C. & Wright,Brian D., 1991. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521326162, October.
  8. Norbert Funke & Weifeng Wu & Yanliang Miao, 2011. "Reviving the Competitive Storage Model," IMF Working Papers 11/64, International Monetary Fund.
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Cited by:
  1. Joseph W. Gruber & Robert J. Vigfusson, 2012. "Interest rates and the volatility and correlation of commodity prices," International Finance Discussion Papers 1065, Board of Governors of the Federal Reserve System (U.S.).
  2. Kilian, Lutz & Lee, Thomas K., 2014. "Quantifying the speculative component in the real price of oil: The role of global oil inventories," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 71-87.
  3. Luis Catão & Roberto Chang, 2012. "Monetary Rules for Commodity Traders," NBER Working Papers 18536, National Bureau of Economic Research, Inc.
  4. Gal Hochman & Scott Kaplan & Deepak Rajagopal & David Zilberman, 2012. "Biofuel and Food-Commodity Prices," Agriculture, MDPI, Open Access Journal, vol. 2(3), pages 272-281, September.
  5. Assa, Hirbod & Dabbous, Amal & Gospodinov, Nikolay, 2013. "A staggered pricing approach to modeling speculative storage: implications for commodity price dynamics," Working Paper 2013-08, Federal Reserve Bank of Atlanta.

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