Optimal Price Dynamics and Speculation with a Storable Good

Roland Benabou

Econometrica, 1989, vol. 57, issue 1, 41-80

Abstract: When the seller of a storable good must keep pace with inflation, buyers will speculate on the timing of price increases to buy and store just before. The unique Markov perfect equilibrium of this game involves recurrent periods during which the firm injects uncertainty into its price, while speculators store in increasing numbers, with possibly a final "run." The stochastic policies of many firms consistently aggregate back to a price index growing at the general rate of inflation. The model establishes that (1) inflation causes price uncertainty; and (2) speculation can be destabilizing and welfare-reducing even under perfect information. Copyright 1989 by The Econometric Society.

Date: 1989
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Working Paper: Optimal price dynamics and speculation with a storable good (1987)
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