BOK Working/Discussion Papers

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Inventory, Factor-Hoarding and the Dynamic Response to Monetary Shocks

Economic Research Institute (82-2-759-5407) 2008.02.19 2862
 This paper proposes a new model accounting for the delayed effect of monetary shock on output. The

 key feature of the model is to distinguish a variety of margins (i.e., inventory adjustments, hours per

worker, work efforts and employments) on which firms adjust output in response to macroeconomic

shocks. When these multiple margins are properly introduced to an otherwise standard modern

monetary business cycles model, the interplay between inventory adjustments and the one-period lag in

adjusting employment can produce the hump-shaped response of output to monetary shocks. More

importantly, this can be done even without relying upon the habit persistence model that has been

decisively rejected in recent papers by Dynan (2000) and Flavin & Nakagawa (2004).

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