We introduce learning into a standard Hotelling model of a non-renewable resource.
By combining these two features we add significantly to the dynamics implied by learning
and the volatility and behaviour of commodity prices.
In terms of the learning model we show how a self confirming equilibrium exists but
is not constant over time. When resource scarcity does not bind the SCE equates to the
Rational Expectations Non-cooperative equilibrium. However, as scarcity binds the SCE
shifts to the Cooperative Rational Expectations Equilibrium and trends at a rate faster
that the rate of time preference. We show how escape dynamics exist which generate
substantial volatility in commodity prices despite the fact the market is subject only
to i.i.d shocks. However unlike in standard models of learning, the shifting nature of
the SCE significantly alters escape dynamics. The time to escapte shortens as scarcity
increases but the magnitude of the dynamics reduces.
Joint paper with Martin Ellison (University of Oxford and CEPR), December 2008.