Abstract
In buffer stocks established by International Commodity Agreements, typically the buffer stock manager (BSM) is given: (i) inadequate resources to defend the price floor on her own; (ii) considerable discretion in day-to-day operations. These two features are shown to imply that the buffer stock can as easily add volatility to the market as remove it. Fact (i) implies that the BSM needs to use speculators: the floor will be defended only if speculators bet on the buffer stock's success. Fact (ii) implies that their expectations about the buffer stock's success can become self-fulfilling prophecies. This opens the way for the price to fluctuate in response to sunspots, or intrinsically irrelevant phenomena, which would have been impossible without the buffer stock. The theory is given anecdotal support from the markets for tin and natural rubber.
Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
