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Money, Inventories and Underemployment in Deflationary Recessions

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  • Gerd Weinrich
  • Luca Colombo

Abstract

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

Suggested Citation

  • Gerd Weinrich & Luca Colombo, 2005. "Money, Inventories and Underemployment in Deflationary Recessions," Computing in Economics and Finance 2005 156, Society for Computational Economics.
  • Handle: RePEc:sce:scecf5:156
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    More about this item

    Keywords

    Inventories; non-tatonnement; price adjustment; non-neutrality of money; deflationary recession;
    All these keywords.

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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