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Inventories, Sticky Prices and the Propogation of Nominal Shocks

Martin Boileau () and Marc-Andre Letendre ()

Department of Economics Working Papers from McMaster University

Abstract: Post-war business cycle fluctuations of output and inflation are remarkably persistent. Many recent sticky-price monetary business cycle models, however, grossly underpredict this persistence. We assess whether adding inventories to a standard sticky-price model raises the persistence of output and inflation. For this addition, we consider three different frameworks: a linear-quadratic inventory model, a factor of production model, and a shopping-cost model. We find that adding inventories increases the persistence of output and inflation, but that the increase is smaller for inflation. Overall, the shopping-cost model best explains the persistence of output and inflation.

JEL-codes: E22 E30 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2004-03
New Economics Papers: this item is included in nep-dge
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