Working Paper No. 02-01

Inventories, Sticky Prices, and the Propagation of Nominal Shock
Martin Boileau and Marc-Andre Letendre
January 2002

ABSTRACT

Post-war business cycle fluctuations of output and inflation are remarkably persistent. 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 transaction costs model. We find that adding inventories increases the persistence of output and inflation, but that the increase is smaller for inflation. Overall, the transaction costs model explains more the persistence of output and inflation than the other models.

DOWNLOAD PAPER