Commodity storage with durable shocks: a simple Markovian model (Q2452155)

This article deals with a model of commodity storage in an economy which randomly alternates between episodes of abundance and scarcity. The article begins with an overview of the existing literature and an outline of the proposed method, whose feature is that does not rely on fixed point methods but on the solution of a system of ordinary differential equations. The second section presents the model details and defines its Markov equilibrium. This is followed by a section presenting the solution of the model and the uniqueness of the equilibrium, as well as an algorithm for its calculation. The last sections of the article present the interpretation of the model and solution in terms of the behavior of the economy, the distribution of stock, the potential applications of the proposed method and suggestions for further research. The article concludes with a detailed appendix with the mathematical proofs of the described properties of the model.