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Inventories, Sticky Prices and the Propogation of Nominal Shocks

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  • Martin Boileau
  • Marc-André Letendre

Abstract

Post-war business cycle fluctuations of output and inflation are remarkably persistent. Many recent sticky-price monetary business cycle models, however, grossly underpredict this persistence. We assess whether adding inventories to a standard sticky-price model raises the persistence of output and inflation. For this addition, we consider three different frameworks: a linear-quadratic inventory model, a factor of production model, and a shopping-cost model. We find that adding inventories increases the persistence of output and inflation, but that the increase is smaller for inflation. Overall, the shopping-cost model best explains the persistence of output and inflation.

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File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2004-03.pdf
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Bibliographic Info

Paper provided by McMaster University in its series Department of Economics Working Papers with number 2004-03.

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Length: 44 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:mcm:deptwp:2004-03

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Cited by:
  1. Matteo Iacoviello & Fabio Schiantarelli & Scott Schuh, 2010. "Input and output inventories in general equilibrium," International Finance Discussion Papers 1004, Board of Governors of the Federal Reserve System (U.S.).
  2. Katsuyuki Shibayama & Jagjit S. Chadha, 2013. "Inventories and the Stockout Contstraint in General Equilibrium," Studies in Economics 1308, Department of Economics, University of Kent.
  3. Menner Martin, 2006. "A Search-Theoretic Monetary Business Cycle Model with Capital Formation," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-36, November.
  4. Richard Mash, 2004. "Optimising Microfoundations for Inflation Persistence," Economics Series Working Papers 183, University of Oxford, Department of Economics.

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