DP740 | Market Stabilization and the Reform of the Common Agricultural Policy


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I solve numerically for stationary rational-expectations equilibria of a two-country, non-linear model of a storable commodity. With constant tariffs, price volatilities in both countries increase with an increase in the tariff rate of one country or with an increase in the storage cost in one country. When one country (`the EC') uses a variable import levy and export subsidy to defend a fixed price floor, increases in the floor (a) increase mean price and decrease price volatility in the EC and (b) decrease mean price, increase volatility and increase private stockholding in the rest of the world. The volatility of farm incomes in the EC are relatively insensitive to increases in the floor.