Abstract:
It is known that simple price limiters may have unexpected consequences in
irregular commodity price fluctuations between bull and bear markets and
complicated impacts on the size of buffer stocks. In particular, imposing
a lower price boundary may lead to a huge buffer stock, e.g. to a ‘butter
mountain’ or a ‘milk lake’ and this is a real problem for regulators since
storage costs may become impossible to finance over time. The relation
between price limiters and the size of buffer stocks is nontrivial and there
may exist some optimal price limiters which require only weak market
interventions and thus provide a rather inexpensive option to regulate
commodity markets. In this article, we use a simple commodity market
model to explore the relation between price limiters and the average
growth rate of the buffer stocks. It is found that these optimal price limiter
levels are simply the minimum values of unstable periodic orbits of the
underlying deterministic system.
