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Commodity price movements in a general equilibrium model of storage


  • David M. Arseneau
  • Sylvain Leduc


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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  • 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.).
  • Handle: RePEc:fip:fedgif:1054

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    References listed on IDEAS

    1. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, March.
    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. 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.
    4. Serena Ng & Francisco J. Ruge-Murcia, 2000. "Explaining the Persistence of Commodity Prices," Computational Economics, Springer;Society for Computational Economics, vol. 16(1/2), pages 149-171, October.
    5. 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.
    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. 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.
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    Cited by:

    1. 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.
    2. Assa, Hirbod & Dabbous, Amal & Gospodinov, Nikolay, 2013. "A staggered pricing approach to modeling speculative storage: implications for commodity price dynamics," FRB Atlanta Working Paper 2013-08, Federal Reserve Bank of Atlanta.
    3. 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.).
    4. Luis Catão & Roberto Chang, 2013. "Monetary Rules for Commodity Traders," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(1), pages 52-91, April.
    5. repec:eee:ecosta:v:4:y:2017:i:c:p:39-56 is not listed on IDEAS
    6. Pfuderer, Simone, 2014. "Are stockholders rational? An experimental approach to testing the competitive storage model," 88th Annual Conference, April 9-11, 2014, AgroParisTech, Paris, France 170537, Agricultural Economics Society.
    7. Andrew Filardo & Jacopo Lombardi & Carlos Montoro, 2018. "Monetary policy spillovers, global commodity prices and cooperation," BIS Working Papers 696, Bank for International Settlements.
    8. Lutz Kilian, 2014. "Oil Price Shocks: Causes and Consequences," Annual Review of Resource Economics, Annual Reviews, vol. 6(1), pages 133-154, October.
    9. Gal Hochman & Scott Kaplan & Deepak Rajagopal & David Zilberman, 2012. "Biofuel and Food-Commodity Prices," Agriculture, MDPI, Open Access Journal, vol. 2(3), pages 1-10, September.
    10. Vorotnikova, Ekaterina, 2016. "Optimal Storage Capacity Allocation in Grain Merchandizing," 2016 Annual Meeting, February 6-9, 2016, San Antonio, Texas 230128, Southern Agricultural Economics Association.

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