The effects of monetary policy on input inventories

Abstract

Abstract This paper explores both the long-run and short-run effects of monetary policy on input inventories in a search model with monetary propagation and two-stage production. Inventories arise endogenously due to search frictions. In the long run, we analytically show that an increase in the money growth rate has hump-shaped real effects on steady-state input inventory investment, input inventory-to-sales ratio as well as sales. These effects are driven by both the extensive and intensive margins in the finished goods market. We then calibrate the model to the US data to study the short-run effects of monetary policy. We first show that our model can reproduce the stylized facts of input inventories quite well and then find that input inventories amplify aggregate fluctuations over business cycles.