Commodity Price Movements in a General Equilibrium Model of Storage

38 Pages Posted: 30 May 2017

See all articles by David M. Arseneau

David M. Arseneau

Board of Governors of the Federal Reserve System

Sylvain Leduc

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Date Written: 2012

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.

Suggested Citation

Arseneau, David M. and Leduc, Sylvain, Commodity Price Movements in a General Equilibrium Model of Storage (2012). FRB International Finance Discussion Paper No. 1054, Available at SSRN: https://ssrn.com/abstract=2976747

David M. Arseneau (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sylvain Leduc

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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