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Commodities, Financialization, and Heterogeneous Agents

SAFE Working Paper No. 131

BoL Working Paper No. 25/2016

70 Pages Posted: 7 Apr 2016 Last revised: 29 Apr 2016

Nicole Branger

University of Muenster - Finance Center Muenster

Patrick Grüning

Bank of Lithuania - CEFER; Vilnius University - Faculty of Economics; Research Center SAFE

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Date Written: April 12, 2016

Abstract

The term 'financialization' describes the phenomenon that commodity contracts are traded for purely financial reasons and not for motives rooted in the real economy. Recently, financialization has been made responsible for causing adverse welfare effects especially for low-income and low-wealth agents, who have to spend a large share of their income for commodity consumption and cannot participate in financial markets. In this paper we study the effect of financial speculation on commodity prices in a heterogeneous agent production economy with an agricultural and an industrial producer, a financial speculator, and a commodity consumer. While access to financial markets is always beneficial for the participating agents, since it allows them to reduce their consumption volatility, it has a decisive effect with respect to overall welfare effects who can trade with whom (but not so much what types of instruments can be traded).

Keywords: Commodities, General Equilibrium, Heterogeneous Preferences, Financial Markets

JEL Classification: E23, G12, G13, Q11, I30

Suggested Citation

Branger, Nicole and Grüning, Patrick and Schlag, Christian, Commodities, Financialization, and Heterogeneous Agents (April 12, 2016). SAFE Working Paper No. 131. Available at SSRN: https://ssrn.com/abstract=2759314 or http://dx.doi.org/10.2139/ssrn.2759314

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Patrick Grüning (Contact Author)

Bank of Lithuania - CEFER ( email )

Totoriu g. 4
Vilnius, LT-01121
Lithuania
+370 5 2680 069 (Phone)

HOME PAGE: http://https://www.lb.lt/cefer

Vilnius University - Faculty of Economics ( email )

Sauletekio al. 9 (II building)
Vilnius, LT-10222
Lithuania

HOME PAGE: http://www.ef.vu.lt/

Research Center SAFE ( email )

Goethe University Frankfurt
Theodor-W.-Adorno Platz 3
Frankfurt am Main, D-60629
Germany

HOME PAGE: http://safe-frankfurt.de/research/all-researchers/details/showauthor/patrick-gruening.html

Christian Schlag

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)
+49 69 798 33901 (Fax)

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