Reviving the Competitive Storage Model: A Holistic Approach to Food Commodity Prices
IMF Working Papers, March 1, 2011
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Bibliographic details
- Authors: Norbert Funke, Weifeng Wu, Yanliang Miao
- Published: March 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455228065.001
Summary and Approach
- Authors: Norbert Funke, Weifeng Wu, Yanliang Miao
- Publication date: March 1, 2011
- Series: Working Paper No. 2011/064; Issue: 064
- Core approach: Augment the Deaton and Laroque (1992, 1996) competitive storage model by incorporating more comprehensive and realistic supply and demand factors:
- output and demand trends
- shocks to the yield
- time-varying interest rates
- Computational note: The computational burden increases exponentially with the augmented specification.
- Objective: Test empirical relevance of the competitive storage model and replicate key empirical patterns of food commodity prices.
Key Findings
- The augmented model succeeds in replicating all four key patterns of food commodity prices.
- Long-run trend:
- 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.
- Short-run fluctuations:
- Short-run price fluctuations are mainly attributable to sizeable, though low-probability, shocks to output such as inclement weather.
- Monetary policy effects:
- 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.
Model Enhancements and Methodology
- Additions to the seminal Deaton and Laroque framework:
- incorporation of output and demand trends
- explicit modeling of yield shocks
- allowing for time-varying real interest rates
- Outcome:
- Despite a sharply increased computational burden, the augmented model reproduces empirical stylized facts for food commodity prices.
Policy Implications and Scenarios
- Scenario: Shifting balance between supply and demand
- Potential outcome: halt or reversal of long-run declining food price trend.
- Scenario: Large negative output shocks (e.g., inclement weather)
- Potential outcome: dominant driver of short-run price spikes.
- Monetary policy considerations:
- In normal conditions: small effects on food prices.
- Nonlinear/asymmetric regime: substantial effects if the real rate crosses a critical threshold.
- Implication for policymakers:
- Monitor real interest rate levels relative to identified thresholds, and account for low-probability large output shocks when assessing food price volatility and designing policy responses.