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Explaining the Delayed Effect of Monetary Policy: The Role of Inventories and Factor-hoarding

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  • Kwang Hwan Kim

Abstract

This paper proposes a new model accounting for the delayed effect of monetary policy shocks on output. The key feature of the model is to distinguish a variety of margins (i.e., inventory adjustments, hours per worker, efforts and employments) on which firms adjust output in response to macroeconomic shock. When these multiple margins are properly introduced to an otherwise standard modern monetary business cycles model, the interplay between inventory adjustments and the one-period lag in adjusting employment can produce the hump-shaped response of output to monetary shock. Given the weak evidence on habit formation at household level found in Dynan (2000) and Flavin and Nakagawa (2008), therefore, this paper provides an alternative explanation for the delayed effect of monetary policy without relying on the habit formation.

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  • Kwang Hwan Kim, 2015. "Explaining the Delayed Effect of Monetary Policy: The Role of Inventories and Factor-hoarding," International Economic Journal, Taylor & Francis Journals, vol. 29(1), pages 37-55, March.
    • Handle: RePEc:taf:intecj:v:29:y:2015:i:1:p:37-55
    DOI: 10.1080/10168737.2014.928896
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