We embed the canonical rational expectations competitive storage
model into a general equilibrium framework thereby allowing the
non-linear commodity price dynamics implied by the competitive
storage model to interact with the broader macroeconomy. Our main
result is that the endogenous movement in interest rates implied
under general equilibrium enhances the effects of competitive
storage on commodity prices. Compared to a model in which the real
interest rate is fixed, we find that storage in general equilibrium
leads to more persistence in commodity prices and somewhat lower
volatility. Moreover, the frequency of stockouts is lower in
general equilibrium. A key mechanism driving this result is a link
between the ability of the household to smooth consumption over
time and the level of storage in the stochasic equilibrium.
Finally, the model is used to examine the macroeconomic effects of
both biofuel subsidies for ethanol producers and, separately,
subsidies designed to insulate households from high food prices.
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