The Simple Analytics of Commodity Futures Markets: Do They Stabilize Prices? Do They Raise Welfare?

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Creator Series Issue number
  • Vol. 14, No. 3
Date created
  • 1990 Spring
Abstract

  • This paper uses a simple, graphical approach to analyze what happens to commodity prices and economic welfare when futures markets are introduced into an economy. It concludes that these markets do not necessarily make prices more or less stable. It also concludes that, contrary to common belief, whatever happens to commodity prices is not necessarily related to what happens to the economic welfare of market participants: even when futures markets reduce the volatility of prices, some people can be made worse off. These conclusions come from a series of models that differ in their assumptions about the primary function of futures markets, the structure of the industries involved, and the tastes and technologies of the market participants.

Related information

  • Parts of this paper have been published in a paper co-authored with Larry Jones: "Price Stability and Futures Trading in Commodities," Quarterly Journal of Economics (May 1990, Vol. 105, Iss. 2, pp. 527–534), https://doi.org/10.2307/2937798.

Corporate Author
  • Federal Reserve Bank of Minneapolis. Research Department
Publisher
  • Federal Reserve Bank of Minneapolis
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