Money, Credit and Inventories in a Sequential Trading Model

I introduce inside money and serially correlated supply shocks to the Uncertain and Sequential Trading (UST) monetary model and test its implications using a vector auto regression impulse response analysis on post-war US data. I find that (a) The importance of money in predicting output is substantially reduced once the stock of inventories is added to the VAR system and (b) Shocks to inventories have a negative persistent effect on output and prices. These findings are broadly consistent with the predictions of the UST model but other findings about the timing of the maximal effects are not.