| Document sans nom First science research paper on the momagri model
We are pleased to announce the publication on the Social Science Research network (SSRN)1. website of the first research paper on the momagri model. Under the heading “Boundedly Rational Exuberance on Commodity Markets” the report was written by Dr. Bertrand Munier, momagri’s Chief Economist and Professor at the Institut d’Administration des Entreprises (IAE) of the University of Paris-La Sorbonne. It sets forth the origin of the momagri model and its operation by focusing particularly on the risks and uncertainty that lie at the heart of the model and, all the more so today, of international decision makers’ concerns. Based on the research conducted by momagri since 2006, the paper has often been presented to the international scientific community, in particular at a workshop held in Paris on June 4 and 5, 20092.
As outlined in Bertrand Munier’s article, the recent discussions on the causes and features of price volatility in agricultural commodities were mainly centered on low short-term elasticity of supply and demand, environmental risks (principally climatic hazards and epizootic diseases), trade policies, monetary policies and biofuel, while underestimating––or even neglecting––the consequences of the growing “financialization” of agricultural markets and the role of short-term investors on futures markets.
The momagri model was primarily built to reach a better assessment of such reality and a better grasp of the “complex” price volatility in agricultural commodities.
To do so, the model was designed with a Central macroeconomic computable general equilibrium module, around which gravitate several peripheral modules, one of them justifiably concentrating on the microeconomic aspect of specific agricultural exposure to risks and uncertainty on “financialized” markets.
A special emphasis is given to the formalization of agricultural market microstructures, as well as the heterogeneity of boundedly rational players operating on agricultural markets (producers and short-term investors), and, more generally, the specific uncertainty experienced by agricultural markets.
The preliminary simulations achieved in March 2008, and later confirmed in March 2009, are showing the capability of the momagri model to closely replicate the price variations observed during the 2001 to 2008 years. But the simulations are also showing that in a scenario of total market liberalization, price volatility could increase if no regulatory measures were implemented.
The momagri model thus demonstrates that the producers’ adaptive expectations (boundedly rationality) as well as the large increase of short-term investors in commodities options, together with a number of interest rate policies, account for a large part of price volatility. Consequently, the price volatility of agricultural commodities is a basically endogenous phenomenon that can be intensified by a number of exogenous factors, such as climatic hazards for instance. Players’ irrationality therefore does not need to be assumed to generate volatility in a computable general equilibrium model, and, more generally, to explain the price “exuberance” we recently observed.
Indeed, this represents an introductory deduction that provides a wealth of theoretical insights on market operations, as well as practical insights regarding agricultural market regulation. However, the research conducted on the momagri model will not stop there and additional improvements will follow in the coming weeks, such as the incorporation of the innovation and environment modules, whose results will be covered in further communications.
Bastien Gibert, Expert, momagri
1 The article is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1508650
2 Please see the www.momagri.org June 8, 2009 article in the Points of View section «We need a revolution in our understanding on how agricultural markets operate.” | | |
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