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On the Sluggish Response of Prices to Money in an Inventory-Theoretic Model of Money Demand

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  • Fernando Alvarez
  • Andrew Atkeson
  • Chris Edmond

Abstract

We exposit the link between money, velocity and prices in an inventory-theoretic model of the demand for money and explore the extent to which such a model can account for the short-run volatility of velocity, the negative correlation of velocity and the ratio of money to consumption, and the resulting stickiness' of the aggregate price level relative to a benchmark model with constant velocity. We find that an inventory-theoretic model of the demand for money is a natural framework for understanding these aspects of the dynamics of money, velocity and prices in the short run.

Suggested Citation

  • Fernando Alvarez & Andrew Atkeson & Chris Edmond, 2003. "On the Sluggish Response of Prices to Money in an Inventory-Theoretic Model of Money Demand," NBER Working Papers 10016, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:10016
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    References listed on IDEAS

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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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