1997 Reports

Speculatively Constrained Optimal Commodity Policies

McLaren, John

Governments store primary commodities for redistributive reasons, or to deal with missing risk markets. For either reason, interactions between public and private storage make it difficult to compute and optimal storage policy: Any announced policy rule will induce equilibrium private responses, in general at each date; accounting for this makes searching for an optimal policy prohibitively complex. Here, a method is developed that permits computation of the optimum in a wide range of cases, by mapping the problem into a far simpler one, a form of dynamic program, without loss of generality. Among the findings are that for a non trivial portion of the parameter space, the optimal policy pegs that price to a function of the current harvest alone; and that commodity price stabilization per se is more attractive as a way of assisting producers, the less risk averse the producers are.