Stabilizing Price Policies and the Futures Market

Harvey Lapan and GianCarlo Moschini

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: Because of the short-term nature of existing commodity futures contracts, optimally hedged producers remain subject to intertemporal income uncertainty, but price stabilization may be detrimental because it negates the benefits of intertemporal production flexibility. Multiperiod futures would be preferred to price stabilization, although they would not provide perfect hedging opportunities, thus leaving scope for government intervention. The optimal price policy requires the support price to be positively correlated to the futures price that prevails when production decisions are made.

Date: 1996-01-01
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Published in Economics Letters 1996, no. 53, pp. 175-182

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