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Estimating a Nonlinear Rational Expectations Commodity Price Model with Unobservable State Variables

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  • Deaton, Angus
  • Laroque, Guy
Abstract
This paper is concerned with the estimation of a model in which a possibly serially correlated stochastic process, the "harvest" of an agricultural commodity, generates a competitive price in a market comprising both final consumers and risk-neutral speculators who can store the commodity at a cost in the anticipation of profit. Because storage cannot be negative, the relationship between prices and harvests is inherently nonlinear and is an unpromising candidate for a linear-quadratic model, or for linearization more generally. Instead, we calculate numerically a policy function in which price is a function of two unobservable state variables, the harvest and current availability, and we use the result to fit the price data. Copyright 1995 by John Wiley & Sons, Ltd.

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  • Deaton, Angus & Laroque, Guy, 1995. "Estimating a Nonlinear Rational Expectations Commodity Price Model with Unobservable State Variables," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(S), pages 9-40, Suppl. De.
    • Handle: RePEc:jae:japmet:v:10:y:1995:i:s:p:s9-40
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