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Inventories, Inflation Dynamics and the New Keynesian Phillips Curve

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  • Thomas A. Lubik

    ()

  • Wing Leong Teo

    ()

Abstract

We introduce inventories into an otherwise standard New Keynesian model and study the implications for inflation dynamics. Inventory holdings are motivated as a means to generate sales for demand-constrained firms. We derive various representa- tions of the New Keynesian Phillips curve with inventories and show that one of these specifications is observationally equivalent to the standard model with respect to the behavior of inflation when the model's cross-equation restrictions are imposed. How- ever, the driving variable in the New Keynesian Phillips curve - real marginal cost - is unobservable and has to be proxied by, for instance, unit labor costs. An alternative approach is to impute marginal cost by using the model's optimality conditions. We show that the stock-sales ratio is linked to marginal cost. We also estimate these various specifications of the New Keynesian Phillips curve using GMM. We find that predictive power of the inventory-specification at best approaches that of the standard model, but does not improve upon it. We conclude that inventories do not play a role in explaining inflation dynamics within our New Keynesian Phillips curve framework.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2010-13.

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Length: 34 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:een:camaaa:2010-13

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References

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  1. Thomas A. Lubik & Wing Leong Teo, 2010. "Inventories and Optimal Monetary Policy," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2010-07, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  3. James A. Kahn & Mark Bils, 2000. "What Inventory Behavior Tells Us about Business Cycles," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 458-481, June.
  4. James M. Nason & Gregor W. Smith, 2008. "The New Keynesian Phillips curve : lessons from single-equation econometric estimation," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Fall, pages 361-395.
  5. Oleksiy Kryvtsov & Virgiliu Midrigan, 2009. "Inventories and Real Rigidities in New Keynesian Business Cycle Models," Working Papers, Bank of Canada 09-9, Bank of Canada.
  6. Aubhik Khan & Julia K. Thomas, 2007. "Inventories and the Business Cycle: An Equilibrium Analysis of ( S, s ) Policies," American Economic Review, American Economic Association, American Economic Association, vol. 97(4), pages 1165-1188, September.
  7. Margaret M. McConnell & Gabriel Perez Quiros, 1997. "Output fluctuations in the United States: what has changed since the early 1980s?," Research Paper, Federal Reserve Bank of New York 9735, Federal Reserve Bank of New York.
  8. Krause, Michael U. & Lopez-Salido, David J. & Lubik, Thomas A., 2008. "Do search frictions matter for inflation dynamics?," European Economic Review, Elsevier, Elsevier, vol. 52(8), pages 1464-1479, November.
  9. Martin Boileau & Marc-Andre Letendre, 2011. "Inventories, sticky prices, and the persistence of output and inflation," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 43(10), pages 1161-1174.
  10. Kahn, James A, 1992. "Why Is Production More Volatile Than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(2), pages 481-510, May.
  11. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 94(1), pages 190-217, March.
  12. Michael Krause & David Lopez-Salido & Thomas Lubik, 2008. "Inflation Dynamics With Search Frctions: A Structural Econometric Analysis," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2008-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  13. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 249-83, April.
  14. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 667-79, September.
  15. Chang, Yongsung & Hornstein, Andreas & Sarte, Pierre-Daniel, 2009. "On the employment effects of productivity shocks: The role of inventories, demand elasticity, and sticky prices," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(3), pages 328-343, April.
  16. Krause, Michael U. & Lubik, Thomas A., 2007. "The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(3), pages 706-727, April.
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Cited by:
  1. Thomas A. Lubik & Wing Leong Teo, 2014. "Deep Habits in the New Keynesian Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 46(1), pages 79-114, 02.
  2. Thomas A. Lubik & Wing Leong Teo, 2009. "Inventories and optimal monetary policy," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Fall, pages 357-382.
  3. Marcel Förster, 2014. "An Empirical Analysis of Business Cycles in a New Keynesian Model with Inventories," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201413, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  4. Teo, Wing Leong, 2011. "Inventories and optimal monetary policy in a small open economy," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(8), pages 1719-1748.

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