Inventories and optimal monetary policy in a small open economy

Wing Leong Teo

Journal of International Money and Finance, 2011, vol. 30, issue 8, 1719-1748

Abstract: We study how inventory investment affects the design of optimal monetary policy in a New Keynesian small open economy model. We find that under producer currency pricing, when the intratemporal elasticity of substitution is smaller than 1, optimal monetary policy in our model with inventories is similar to a standard model without inventories. However, when the intratemporal elasticity of substitution is larger than 1, inventory investment increases the importance of nominal exchange rate stabilization relative to a standard model without inventories. The importance of nominal exchange rate stabilization increases with the intratemporal elasticity of substitution.

Keywords: Inventories; Small open economy; New Keynesian model; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E2 E52 F41 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:30:y:2011:i:8:p:1719-1748

DOI: 10.1016/j.jimonfin.2011.09.003

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