Putting the Empirical Commodity Storage Model Back on Track: Crucial Implications of a “Negligible” Trend

The dynamics of consumption and stocks are crucial for analysis of commodity prices and policies. But empirical application of the standard storage model has been derailed by failure to replicate high real price autocorrelation. Our proposed storage model is the first empirical model to recognize th...

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Bibliographic Details
Published in:American journal of agricultural economics 2021-05, Vol.103 (3), p.1034-1057
Main Authors: Bobenrieth, Eugenio S.A., Bobenrieth, Juan R.A., Guerra, Ernesto A., Wright, Brian D., Zeng, Di
Format: Article
Language:English
Subjects:
Agricultural economics
Autocorrelation
C51
C52
C53
Commodities
commodity price dynamics
Commodity prices
consistency
Constraint modelling
D84
DSGE
Economic analysis
Economic models
Empirical analysis
Endogenous
estimation
Interest rates
inventories
jumps
Macroeconomics
Nonstationarity
Pricing
Stochasticity
Trends
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Summary:The dynamics of consumption and stocks are crucial for analysis of commodity prices and policies. But empirical application of the standard storage model has been derailed by failure to replicate high real price autocorrelation. Our proposed storage model is the first empirical model to recognize the full implications of nonstationarity for price behavior and speculative arbitrage with an occasionally binding non‐negativity constraint, a challenge shared by DSGE models in macroeconomics and growth. Our consistent least squares strategy estimates first the endogenous price trend induced by a latent trend in production and then the interest rate and a target separating two distinct dynamic regimes. In one, price has a stochastic trend with drift equal to the interest rate; in the other, price exhibits expected jumps from current price to a trending target price in the stockout region. Neglect of small trends can increase measured price autocorrelation and variation to the high observed levels.
ISSN:0002-9092
1467-8276
DOI:10.1111/ajae.12133