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Inventories and optimal monetary policy
We introduce inventories into a standard New Keynesian Dynamic Stochastic General Equilibrium model to study the effect on the design of optimal monetary policy. The possibility of inventory investment changes the transmission mechanism in the model by de-coupling production from final consumption. This allows for a higher degree of consumption smoothing since firms can add excess production to their inventory holdings. We consider both Ramsey-optimal monetary policy and a monetary policy that maximizes consumer welfare over a set of simple interest rate feedback rules. Surprisingly, we find ...
Inventories, inflation dynamics, and the New Keynesian Phillips curve
We introduce inventories into an otherwise standard New Keynesian model and study the implications for inflation dynamics. Inventory holdings are motivated as a means to generate sales for demand-constrained firms. We derive various representations of the New Keynesian Phillips curve with inventories and show that one of these specifications is observationally equivalent to the standard model with respect to the behavior of inflation when the model's cross-equation restrictions are imposed. However, the driving variable in the New Keynesian Phillips curve - real marginal cost - is ...
Deep habits in the New Keynesian Phillips curve
We derive and estimate a New Keynesian Phillips curve (NKPC) in a model where consumers are assumed to have deep habits. Habits are deep in the sense that they apply to individual consumption goods instead of aggregate consumption. This alters the NKPC in a fundamental manner as it introduces expected and contemporaneous consumption growth as well as the expected marginal value of future demand as additional driving forces for inflation dynamics. We construct the driving process in the deep habits NKPC by using the model's optimality conditions to impute time series for unobservable ...