Inventories and the Phillips Curve
Introducing inventories into a New Keynesian model implies a Phillips curve that is driven by marginal cost, according to a paper published by the Richmond Federal Reserve in February.
The paper, by Thomas Lubik and Wing Leong Teo, finds that the presence of inventories changes the notion of marginal cost. They find, however, that their specification of the model is unable to capture inflation dynamics, leading them to suggest ways forward for research into the topic. "First, inventories can be
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