Monetary policy and the role of inventory investment

Rubio, Margarita and Schuh, Scott (2017) Monetary policy and the role of inventory investment. Applied Economics Letters, 24 (21). pp. 1605-1621. ISSN 1466-4291

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Abstract

In this paper, we develop a dynamic stochastic general equilibrium model (DSGE) with sticky prices and inventory investment to explore the relationship between inventories and monetary policy. We use the traditional inventory literature as a basis to motivate this extension of the benchmark model and propose inventories as a factor of production. Within this setting, we test the empirical results in Irvine and Schuh (2005), who find that, since the mid-80s, monetary policy changed its target towards the inventory component of GDP. We explore this idea in our theoretical model and conclude through simulations that this is a plausible complementary explanation for the reduction in output volatility that was observed during the Great Moderation period.

Item Type: Article
Keywords: DSGE, sticky prices, inventories, monetary policy, Great Moderation
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > School of Economics
Identification Number: 10.1080/13504851.2017.1363855
Depositing User: Rubio, Margarita
Date Deposited: 02 Aug 2017 07:43
Last Modified: 12 Oct 2017 23:31
URI: http://eprints.nottingham.ac.uk/id/eprint/44563

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