Speaker: Wang Gewei, University of California, Berkeley
Sponsor: The Center of Economic Research Shandong University
Date: 23/02/2012 15:00pm - 16:00pm
Location: Room 401, Run Run Shaw Science Building,Central Campus
Abstract:
I develop a New Keynesian model with inventories and convex costs of labor adjustment.
For each of the three empirically observed responses to monetary policy shocks: (1) the slow adjustment of inventories compared to changes in sales; (2) the delayed and gradual response of inflation; and (3) the transitory movement in the aggregate price level in the same direction as the interest rate, also known as the “price puzzle,” my model has important implications. First, adjustment costs counteract the financing-cost effect of interest rate changes on inventory holdings, but are still inadequate for the calibrated model to generate countercyclical inventory to-sales ratios. I find that this financing-cost effect needs to be reduced by 80 percent for the model to predict inventory behavior correctly. Second, firm-specific adjustment costs in production increase the degree of real rigidity for price adjustment, so the response of inflation in the presence of high aggregate marginal costs is still slow-moving and persistent. Finally, the motive of cost smoothing for holding inventories implies that marginal costs should move in the opposite direction as the interest rate, which casts doubt on the use of the cost channel to explain the “price puzzle.”