Commodity storage with durable shocks : A simple Markovian model

We model an economy that alternates randomly between abundance and scarcity episodes. We develop an original method to characterize in detail the structure of the Markovian competitive equilibrium. Accumulation and drainage of stocks are the main focuses. Economically appealing comparative statics results are proved. We also characterize stationary distribution of states. We extend the model to discuss price stabilization policies, injection and release costs, and limited storage capacity. Overall, the analysis delineates the notion of "flexible economy".