Boundedly Rational Exuberance on Commodity Markets
31 Pages Posted: 19 Nov 2009
Date Written: November 11, 2009
Recent discussions on the volatility of agricultural prices have been drawing on factors as low short term elasticities of supply and demand, climatic risk, market uncertainty, central banks monetary policies, trade barriers, biofuel development and, finally, speculation. Much debate has aroused about the role of such or such factor. The Momagri 2 Model has been designed as a system of modules, characterising agricultural sectors and the volatility of the prices there, around a macroeconomic computable general equilibrium model, which, by itself, wouldn’t generate much price volatility. In this paper, we focus on the specific micro module of agricultural activity under uncertainty on a “financialized” market. The emphasis is laid on market microstructure, heterogeneity of boundedly rational agents, and the specific uncertainty of agricultural markets. Preliminary simulations show that under conservative parametric values, the integrated model produces strong price volatility of the type experienced in the 2001-2009 decade. A scenario of extreme markets liberalization show that such a policy increases, if anything, the volatility of agricultural prices. We argue that producers’ boundedly rational expectations on such volatile markets, as well as the large increase of short term investors in options of commodities, together with interest rate policies and financialized market’s micro-structures, account for the largest part of this volatility. Exuberance doesn’t need irrationality to appear. Bounded rationality is sufficient.
Keywords: Uncertainty, financialized markets, informative behavior of actors, asymmetric information, bounded rationality, expectations, exuberance, agricultural markets, speculation, endogenous price volatility, trade liberalization policies
JEL Classification: G15, G18, G10, G12
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