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Money, Inventories and Underemployment in Deflationary Recessions

  • Gerd Weinrich
  • Luca Colombo

This paper investigates monetary shocks and the rôle of inventories with respect to the occurrence of deflationary recessions. We propose a non-tâtonnement approach involving temporary equilibria with rationing in each period and price adjustment between successive periods. By amplifying spillover effects inventories imply that, following a restrictive monetary shock, the economy may converge to a quasi-stationary Keynesian underemployment state, in which case money is persistently non-neutral. Contrary to conventional wisdom, this is favored by sufficient downward flexibility of the nominal wage. The model is applied to the current deflationary Japanese recession, and we propose an economic policy to overcome it

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 156.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:156
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