Interest Rate Dynamics and Commodity Prices

TL;DR

This paper extends the competitive storage model to include stochastic interest rates, providing a theoretical framework to better understand their complex influence on commodity prices.

Contribution

It introduces a novel extension of the storage model with stochastic interest rates, establishing conditions for solutions and analyzing their impact on prices.

Findings

Conditions for existence and uniqueness of solutions

Theoretical insights into interest rate and price interactions

Quantitative analysis of interest rate effects on commodity prices

Abstract

In economic studies and popular media, interest rates are routinely cited as a major factor behind commodity price fluctuations. At the same time, the transmission channels are far from transparent, leading to long-running debates on the sign and magnitude of interest rate effects. Purely empirical studies struggle to address these issues because of the complex interactions between interest rates, prices, supply changes, and aggregate demand. To move this debate to a solid footing, we extend the competitive storage model to include stochastically evolving interest rates. We establish general conditions for existence and uniqueness of solutions and provide a systematic theoretical and quantitative analysis of the interactions between interest rates and prices.