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Inventories and optimal monetary policy in a small open economy

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  • Teo, Wing Leong

Abstract

We study how inventory investment affects the design of optimal monetary policy in a New Keynesian small open economy model. We find that under producer currency pricing, when the intratemporal elasticity of substitution is smaller than 1, optimal monetary policy in our model with inventories is similar to a standard model without inventories. However, when the intratemporal elasticity of substitution is larger than 1, inventory investment increases the importance of nominal exchange rate stabilization relative to a standard model without inventories. The importance of nominal exchange rate stabilization increases with the intratemporal elasticity of substitution.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 8 ()
Pages: 1719-1748

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:8:p:1719-1748

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Inventories; Small open economy; New Keynesian model; Optimal monetary policy;

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Cited by:
  1. Marcel Förster, 2014. "An Empirical Analysis of Business Cycles in a New Keynesian Model with Inventories," MAGKS Papers on Economics 201413, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. Marcel Förster, 2013. "The Great Moderation: Inventories, Shocks or Monetary Policy?," MAGKS Papers on Economics 201348, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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