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Reviving the Competitive Storage Model

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Author Info

  • Norbert Funke
  • Weifeng Wu
  • Yanliang Miao

Abstract

We revive in this paper the empirical relevance of the competitive storage model by taking a holistic approach to food commodity prices. We augment the seminal Deaton and Laroque (1992, 1996) model by incorporating more comprehensive and realistic supply and demand factors: output and demand trends, shocks to the yield, and time-varying interest rates. While the computational burden increases exponentially, the augmented model succeeds in replicating all four key patterns of food commodity prices. Our simulation and comparative statics also show that (i) the long-run declining trend of food prices may come to a halt or even reverse due to the shifting balance between supply and demand; (ii) short-run price fluctuations are mainly attributable to sizeable, though low-probability, shocks to output such as inclement weather; and (iii) the impact of monetary policy, though small in normal times, is nonlinear and asymmetric, and can become large if the real rate passes a certain threshold.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/64.

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Length: 47
Date of creation: 01 Mar 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/64

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Related research

Keywords: Agricultural commodities; Agricultural prices; Economic models; real interest rate; price elasticity; kurtosis; skewness; real interest rates; prototype model; statistics; autocorrelation; rational expectations; monetary policy; probability; inflation; normal distribution; forecasting; prediction; time series; adaptive expectations; correlations; stochastic process; econometrics; computation; matching theory; horizontal axis; price level; standard error; parameter value; optimization; standard deviations; nonlinearity; calibration; survey; normal distributions; equation; free parameter; correlation; nominal interest rate; nominal interest rates; equations; probability distribution; numerical integration;

This paper has been announced in the following NEP Reports:

References

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  1. Angus Deaton & Guy Laroque, 2002. "A model of commodity prices after Sir Arthur Lewis," Working Papers 201, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
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Cited by:
  1. 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.
  2. David M. Arseneau & Sylvain Leduc, 2012. "Commodity price movements in a general equilibrium model of storage," International Finance Discussion Papers 1054, Board of Governors of the Federal Reserve System (U.S.).

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