Sluggish Responses of Prices and Inflation to Monetary Shocks in an Inventory Model of Money Demand

Posted: 26 Nov 2008

See all articles by Fernando Alvarez

Fernando Alvarez

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Andrew Atkeson

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER)

Chris Edmond

New York University

Date Written: November 2008

Abstract

We examine the responses of prices and inflation to monetary shocks in an inventory-theoretic model of money demand. We show that the price level responds sluggishly to an exogenous increase in the money stock because the dynamics of households' money inventories leads to a partially offsetting endogenous reduction in velocity. We also show that inflation responds sluggishly to an exogenous increase in the nominal interest rate because changes in monetary policy affect the real interest rate. In a quantitative example, we show that this nominal sluggishness is substantial and persistent if inventories in the model are calibrated to match U.S. households' holdings of M2.

Keywords: money, prices, velocity, interest rates, inflation, asset markets, segmentation

JEL Classification: E31, E41, E43, E51

Suggested Citation

Alvarez, Fernando and Atkeson, Andrew G. and Edmond, Chris, Sluggish Responses of Prices and Inflation to Monetary Shocks in an Inventory Model of Money Demand (November 2008). Available at SSRN: https://ssrn.com/abstract=1307094

Fernando Alvarez (Contact Author)

University of Chicago - Department of Economics ( email )

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Andrew G. Atkeson

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Chris Edmond

New York University ( email )

Stern School of Business
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New York, NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~cedmond/

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