Abstract
This paper presents a macroeconomic model containing optimizing, inventory-holding firms that is consistent with a number of prominent empirical regularities concerning fluctuations in output, exchange rates, relative prices, and money. Prices are sticky, but they are not predetermined. Still, our model is consistent with exchange rate overshooting in the sense of Dornbusch. Typical sticky-price models allow a divergence between current production and current demand, but this divergence is never allowed to feed back into the model. Our optimal inventory adjustments reconcile divergences between current demand and production, and the inventory stock movements provide expected future dynamics.
Full Citation
Quarterly Journal of Economics
vol.
100
,
(January 01, 1985):
887
-914
.