The Buffer Stock Concept and its Applications
The purpose of a buffer stock model is to show how the impact of shocks can be taken up in one variable, which we call the instrument, in order to protect other variables, the targets, from the effects of the shock. The target variables may be costly to adjust in the short run or there may be advantages in stabilising their levels. In either case there would be some advantage in allowing the effects of disturbances to be taken up elsewhere. Given these characteristics in the targets, an instrument — or buffer stock — can be chosen which is less costly to adjust than the other variables. A buffer stock model is therefore a model which explains why an instrument variable i.e. the buffer stock, would be allowed to adjust in order to stabilise the target variables when shocks occur, specifically in order to reduce costs associated with instability or change. A stock of money, grain or raw materials are all buffer stocks by nature of the function they perform: this function may be enhanced by intrinsic qualities of the stocks themselves, but it is the function that is the important factor when defining the essence of a buffer stock. They protect illiquid asset stocks, grain prices and production levels from the variability that results from irregular receipts and payments, good and bad harvests, and booms and slumps in demand. The three examples will be taken in reverse order to illustrate the concept of a buffer stock model.
Unable to display preview. Download preview PDF.