Reviving the Competitive Storage Model: A Holistic Approach to Food Commodity Prices

By Norbert Funke, Weifeng Wu, Yanliang Miao

March 1, 2011

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Norbert Funke, Weifeng Wu, and Yanliang Miao. Reviving the Competitive Storage Model: A Holistic Approach to Food Commodity Prices, (USA: International Monetary Fund, 2011) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We revive in this paper the empirical relevance of the competitive storage model by taking a holistic approach to food commodity prices. We augment the seminal Deaton and Laroque (1992, 1996) model by incorporating more comprehensive and realistic supply and demand factors: output and demand trends, shocks to the yield, and time-varying interest rates. While the computational burden increases exponentially, the augmented model succeeds in replicating all four key patterns of food commodity prices. Our simulation and comparative statics also show that (i) the long-run declining trend of food prices may come to a halt or even reverse due to the shifting balance between supply and demand; (ii) short-run price fluctuations are mainly attributable to sizeable, though low-probability, shocks to output such as inclement weather; and (iii) the impact of monetary policy, though small in normal times, is nonlinear and asymmetric, and can become large if the real rate passes a certain threshold.

Subject: Commodity prices, Consumption, Food prices, Price elasticity, Real interest rates

Keywords: Consumer demand, Market price, Real interest rate, Shadow price, WP

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/064
Stock No:

WPIEA2011064
ISBN:

9781455228065
ISSN:

1018-5941

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