Commodity price movements in a general equilibrium model of storage

David Arseneau and Sylvain Leduc

No 1054, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: 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.

Date: 2012
New Economics Papers: this item is included in nep-agr and nep-dge
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Commodity Price Movements in a General Equilibrium Model of Storage (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1054

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