Inventories, sticky prices, and the persistence of output and inflation

Martin Boileau, Marc-André Letendre
2011 Applied Economics  
Post-war business cycle fluctuations of output and inflation are remarkably persistent. Many recent sticky-price 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 a shopping-cost model. In the model, consumers find shopping activities costly, and the cost of shopping depends on the stock of goods available. In this context, producers manage
more » ... ventories to smooth production and to affect the cost of shopping. We find that the shopping-cost model generates a persistence for output and inflation that matches the persistence observed in the post-1985 US data. JEL classification: E22, E30.
doi:10.1080/00036840802600343 fatcat:hbalyx2nyvhqjdkohiyhoiyu5i