Money, Inventories and Underemployment in Deflationary Recessions

Gerd Weinrich and Luca Colombo

No 156, Computing in Economics and Finance 2005 from Society for Computational Economics

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

Keywords: Inventories; non-tatonnement; price adjustment; non-neutrality of money; deflationary recession (search for similar items in EconPapers)
JEL-codes: D45 D50 E32 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-mac and nep-mon
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