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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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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, 2007. "Input and Output Inventories in General Equilibrium," Boston College Working Papers in Economics 658, Boston College Department of Economics, revised 23 Oct 2009.
  2. Richard Mash, 2006. "Optimising Microfoundations for Inflation Persistence," Computing in Economics and Finance 2006 457, Society for Computational Economics.
  3. Katsuyuki Shibayama & Jagjit S. Chadha, 2013. "Inventories and the Stockout Contstraint in General Equilibrium," Studies in Economics 1308, Department of Economics, University of Kent.
  4. 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.

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