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Inventories, Sticky Prices and the Propogation of Nominal Shocks

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Author Info
Martin Boileau
Marc-André Letendre

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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.

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Paper provided by McMaster University in its series Department of Economics Working Papers with number 2004-03.

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Length: 44 pages
Date of creation: Mar 2004
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Handle: RePEc:mcm:deptwp:2004-03

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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  1. repec:bep:maccon:v:6:y:2006:i:1:p:1384-1384 is not listed on IDEAS
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  2. Richard Mash, 2004. "Optimising Microfoundations for Inflation Persistence," Economics Series Working Papers 183, University of Oxford, Department of Economics. [Downloadable!]
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