Eugenio Bobenrieth (Pontifical Catholic University of Chile)

Recent high volatility of prices of major commodities has generated a wide array of analyses and policy prescriptions that reveal the continued failure of economists to approach a consensus on the nature of the phenomenon and its implications for policy. Here we present an extension of the standard storage model in which price expectations are unbounded, and derive its implications for price time series and empirical tests of price behavior. In this model commodity value is equal to marginal consumption value, and hence the range of price behavior it can model rules out bubbles as defined in financial economics. The model can exhibit behavior with episodes of price runs that could be characterized as “explosive” and might seem to be bubble-like. At sufficiently long holding periods, a given sample will yield returns consistent with mean reversion, even though the long run expectation of price is infinite.