The Effects of Oil Inventories on Growth Prospects, Futures Markets, and Risk Premia
66 Pages Posted: 4 Jun 2016 Last revised: 29 Sep 2017
Date Written: January 11, 2017
This paper studies the effects of introducing storable inputs into a general equilibrium model of endogenous growth. We explicitly account for an occasionally binding non-negativity constraint on storage. To solve the model, we rely on global non-linear solution methods, allowing us to make conditional statements on endogenous variables. We find a substantial nonlinear impact of inventory levels on growth prospects in the economy. The state of commodity holdings has an important impact on utilization of production capacity. In an economy with endogenous growth risks, firms target an optimal level of inventories to be able to increase oil usage in boom times. In an economy with transitory shocks only, the opposite is true. Macroeconomic dynamics implied by the model explain the positive slope of the term structure of futures premia and identify inventories as a nexus between the comovement of oil prices and the risk-free rate.
Keywords: Commodities, storage, futures markets, endogenous growth
JEL Classification: D24, D51, G12
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