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Commodity-Price Destabilizing, Commodity Price Stabilization

McLaren, John

In buffer stocks established by International Commodity Agreements, typically the buffer stock manager (BSM) is given: (i) inadequate resources to defend the price floor on her own; (ii) considerable discretion in day-to-day operations. These two features are shown to imply that the buffer stock can as easily add volatility to the market as remove it. Fact (i) implies that the BSM needs to use speculators: the floor will be defended only if speculators "bet" on the buffer stock's success can become self-fulfilling prophecies. This open the way for the price to fluctuate in response to "sunspots," or intrinsically irrelevant phenomena, which would have been impossible without the buffer stock. The theory is given anecdotal support from the markets for tin and natural rubber.

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Academic Units
Economics
Publisher
Department of Economics, Columbia University
Series
Department of Economics Discussion Papers, 656
Published Here
February 25, 2011

Notes

July 1993.

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