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The Great Moderation: Inventories, Shocks or Monetary Policy?

  • Marcel Förster


    (University of Giessen)

This paper presents a New Keynesian DSGE model with inventory holding firms. The model distinguishes between goods and materials, for both production as well as for inventories. The more detailed treatment of inventory holdings offers new insights into the determinants of business cycles before and during the Great Moderation. Via Bayesian estimation we determine the distributions of the parameters for U.S. data for two subsamples. Our results show that impulse responses change significantly in terms of magnitude and persistence over time. Shocks in the labor market have gained importance since the Great Moderation and they explain the volatility of many variables. We reject the hypothesis of better inventory management and improved monetary policy as explanations for the Great Moderation. Instead, labor supply developments and changes in cost associated with capital play a key role for the reduced fluctuations.

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Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201348.

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Length: 45 pages
Date of creation: 2013
Date of revision:
Publication status: Forthcoming in
Handle: RePEc:mar:magkse:201348
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  1. Aubhik Khan & Julia K. Thomas, 2004. "Modeling Inventories Over the Business Cycle," NBER Working Papers 10652, National Bureau of Economic Research, Inc.
  2. Hashmat Khan & Charlotta Groth, 2007. "Investment Adjustment Costs: An Empirical Assessment," Carleton Economic Papers 07-08, Carleton University, Department of Economics, revised Dec 2010.
  3. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden).
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  5. Jonathan McCarthy & Egon Zakrajsek, 2003. "Inventory dynamics and business cycles: what has changed?," Finance and Economics Discussion Series 2003-26, Board of Governors of the Federal Reserve System (U.S.).
  6. Luca Gambetti & Jordi Galí, 2007. "On the sources of the Great Moderation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  7. Thomas A. Lubik & Wing Leong Teo, 2009. "Inventories and Optimal Monetary Policy," School of Economics Working Papers 2009-33, University of Adelaide, School of Economics.
  8. Wen, Yi, 2005. "Understanding the inventory cycle," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1533-1555, November.
  9. Hashmat Khan & John Tsoukalas, 2010. "Investment shocks and the comovement problem," Post-Print hal-00753046, HAL.
  10. Giannone, Domenico & Lenza, Michele & Reichlin, Lucrezia, 2007. "Explaining The Great Moderation: It Is Not The Shocks," CEPR Discussion Papers 6600, C.E.P.R. Discussion Papers.
  11. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  12. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Working Papers 341, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  13. Teo, Wing Leong, 2011. "Inventories and optimal monetary policy in a small open economy," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1719-1748.
  14. Chang-Jin Kim & James Morley & Jeremy Piger, 2008. "Bayesian counterfactual analysis of the sources of the great moderation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(2), pages 173-191.
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