Inventories and optimal monetary policy in a small open economy |
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Authors: | Wing Leong Teo |
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Institution: | School of Economics, University of Nottingham Malaysia Campus, Jalan Broga, 43500 Semenyih, Selangor, Malaysia |
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Abstract: | We study how inventory investment affects the design of optimal monetary policy in a New Keynesian small open economy model. We find that under producer currency pricing, when the intratemporal elasticity of substitution is smaller than 1, optimal monetary policy in our model with inventories is similar to a standard model without inventories. However, when the intratemporal elasticity of substitution is larger than 1, inventory investment increases the importance of nominal exchange rate stabilization relative to a standard model without inventories. The importance of nominal exchange rate stabilization increases with the intratemporal elasticity of substitution. |
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Keywords: | JEL classification: E2 E52 F41 |
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