Commodity Price Movements in a General Equilibrium Model of Storage

David Arseneau and Sylvain Leduc

IMF Economic Review, 2013, vol. 61, issue 1, 199-224

Abstract: 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.

Date: 2013
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Working Paper: Commodity price movements in a general equilibrium model of storage (2012)
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