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Commodity Price Movements in a General Equilibrium Model of Storage

  • David M Arseneau
  • Sylvain Leduc

The paper embeds the canonical rational expectations competitive storage model into a general equilibrium framework thereby allowing the nonlinear commodity price dynamics implied by the competitive storage model to interact with the broader macroeconomy. The paper's main result is that the endogenous movement in interest rates implied under general equilibrium enhances the effects of competitive storage on commodity prices. Compared with a model in which the real interest rate is fixed, the paper finds that storage in general equilibrium leads to more persistence in commodity prices and to a lower frequency of stockouts. 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 stochastic equilibrium. Finally, the model is used to examine the macroeconomic effects of biofuel subsidies for ethanol producers.

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Article provided by Palgrave Macmillan in its journal IMF Economic Review.

Volume (Year): 61 (2013)
Issue (Month): 1 (April)
Pages: 199-224

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Handle: RePEc:pal:imfecr:v:61:y:2013:i:1:p:199-224
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  1. Leduc, Sylvain & Sill, Keith, 2004. "A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 781-808, May.
  2. Julia K. Thomas, 2002. "Is Lumpy Investment Relevant for the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 508-534, June.
  3. 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.
  4. NG, Serena & RUGE-MURCIA, Francisco J., 1997. "Explaining the Persistence of Commodity Prices," Cahiers de recherche 9709, Universite de Montreal, Departement de sciences economiques.
  5. Martin Bodenstein & Luca Guerrieri, 2011. "Oil efficiency, demand, and prices: a tale of ups and downs," International Finance Discussion Papers 1031, Board of Governors of the Federal Reserve System (U.S.).
  6. 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.
  7. repec:cup:cbooks:9780521326162 is not listed on IDEAS
  8. Norbert Funke & Weifeng Wu & Yanliang Miao, 2011. "Reviving the Competitive Storage Model; A Holistic Approach to Food Commodity Prices," IMF Working Papers 11/64, International Monetary Fund.
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