Inventory dynamics and endogenous persistence in a new Keynesian model

Sedjro Aaron Alovokpinhou, Christopher Malikane and Tshepo Mokoka

Applied Economics, 2022, vol. 54, issue 17, 1957-1973

Abstract: We show that a New Keynesian model incorporating inventory dynamics can generate a hump-shaped response of macro-variables to shocks even without habit formation. The impulse responses from the calibrated model show that, in the absence of habit formation, the macro-variables, including output and consumption gaps and the real wage, display a gradual hump-shaped response to monetary policy shocks. We calibrate seven other variants of the model without habit formation. We find that the results still hold in a flexible price model, while the presence of inventories drives the persistence of the macro-variables. Besides, the model replicates most of the empirical business cycle regularities of inventories and the inventory–sales ratio in the data.

Date: 2022
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DOI: 10.1080/00036846.2021.1983144

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