The Vulnerability of Price Stabilization Schemes to Speculative Attack

Abstract

This paper examines the effects of government attempts to stabilize the prices of commodities by use of buffer stocks. Agricultural goods subject to supply uncertainty as well as depletable resources are considered. In each case, it is shown that the resulting rational expectations competitive equilibrium contains a speculative attack--a situation where the entire government stock is suddenly purchased by previously inactive speculators. The analysis is applied to the historical attempt to peg the gold price, which caused the attack of 1968. The insights gained and the methodology developed also apply to the various international agreements to impose bans on commodity prices which have been proposed by the United Nations Conference on Trade and Development.

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