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Inventories, sticky prices, and the persistence of output and inflation

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  • Martin Boileau
  • Marc-Andre Letendre

Abstract

Post-war business cycle fluctuations of output and inflation are remarkably persistent. Many recent sticky-price 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 a shopping-cost model. In the model, consumers find shopping activities costly, and the cost of shopping depends on the stock of goods available. In this context, producers manage inventories to smooth production and to affect the cost of shopping. We find that the shopping-cost model generates a persistence for output and inflation that matches the persistence observed in the post-1985 US data.

Suggested Citation

  • Martin Boileau & Marc-Andre Letendre, 2011. "Inventories, sticky prices, and the persistence of output and inflation," Applied Economics, Taylor & Francis Journals, vol. 43(10), pages 1161-1174.
  • Handle: RePEc:taf:applec:v:43:y:2011:i:10:p:1161-1174
    DOI: 10.1080/00036840802600343
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    References listed on IDEAS

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    Cited by:

    1. Lubik, Thomas A. & Teo, Wing Leong, 2012. "Inventories, inflation dynamics and the New Keynesian Phillips curve," European Economic Review, Elsevier, vol. 56(3), pages 327-346.
    2. Matteo Iacoviello & Fabio Schiantarelli & Scott Schuh, 2011. "Input And Output Inventories In General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(4), pages 1179-1213, November.
    3. Thomas A. Lubik & Wing Leong Teo, 2009. "Inventories and optimal monetary policy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 357-382.

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