Journal of Development Economics 21 (1986) 89-109. North-Holland STOCK EQUILIBRIUM IN FLEXPRICE MARKETS IN MACROMODELS FOR LESS DEVELOPED ECONOMIES The Case of Food Speculation Amitava Krishna DUTT* Florida International University, Miami, FL 33199, USA Received March 1984, final version received October 1984 This paper extends macroeconomic models of less developed economies with a flexprice agricultural sector and a fixprice non-agricultural sector to allow for stock equilibrium in flexprice markets as advocated by Hicks, and to thereby incorporate the empirically important phenomenon of food speculation. It is shown that models ignoring such features may yield incorrect insights regarding reality, and that increased speculation in foodgrains is likely to result in adverse consequences for both growth prospects and the distribution of income. 1. Introduction Almost a decade ago Hicks (1974) wrote: 'One of the most important things which we have learned from Keynes is that prices, in a flexprice market, though they may appear to be determined by current demand for the commodity and new supplies coming forward, are in reality determined by the willingness of traders to hold stocks. The equilibrium of the market is a stock equilibrium, not a flow equilibrium. Though Keynes made the point (in the "General Theory") chiefly with reference to financial markets, it is clear that it holds quite generally - for all markets in which there is a holding of stocks.' In a footnote he added that 'flexprice markets in which there is no holding of stocks are very exceptional - in the real world, though not in economic textbooks!' Macroeconomic models of less developed countries as developed in Cardoso (1981), and Taylor (1982, 1983), concerned with the interaction of *This paper is a considerably shortened and revised version of a chapter of my doctoral dissertation submitted to the Massachusetts Institute of Technology in 1982. I would like to thank Richard Eckaus, Paul Krugman, the participants of seminars at the Universities of Calcutta and Pennsylvania and the Massachusetts Institute of Technology, and especially Lance Taylor, for discussions and comments. 0304-3878/86/$3.50 © 1986, Elsevier Science Publishers B.V. (North-Holland)