Dynamic simulations on overshooting of flexible commodity prices with a modified arbitrage condition |
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| Authors: | Peter Karungu Michael R Reed David Allen |
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| Institution: | 1. Economics Department , University of the Witwatersrand;2. Department of Agricultural Economics , University of Kentucky;3. Department of Statistics , University of Kentucky |
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| Abstract: | Applying a Neo‐Keynesian approach, this study investigates whether in the short run flexible commodity prices overshoot their long‐run equilibrium whenever there is a monetary change. Two differential equations are generated depicting the adjustment paths for commodity prices and prices of manufactures. With a modified arbitrage condition that incorporates convenience yield, flexible commodity prices are shown to overshoot their long‐run equilibrium when compared with less‐flexible prices of manufactured goods. Simulation results support the breakdown of money neutrality in the short run. Inflation rate and degree of rigidity of prices of manufactures are shown to have a significant effect on the adjustment paths. Convenience yield did not influence the adjustment mechanism. |
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