Discussion Paper

(S,s) inventory policies in general equilibrium

Abstract: We study the aggregate implications of (S,s) inventory policies in a dynamic general equilibrium model. Firms in the model's retail sector face idiosyncratic demand risk, and (S,s) inventory policies are optimal because of fixed order costs. The model economy replicates salient features of the business cycle and reconciles evidence that orders are more volatile than sales, and that inventory investment is positively correlated with sales. There are two main results. First, we find that general equilibrium effects and the optimal order size are important for the economy's response to exogenous shocks. Second, we find that key features of our results are independent of the presence of idiosyncratic risk.

Keywords: Inventories;

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Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Discussion Paper / Institute for Empirical Macroeconomics

Publication Date: 1995

Number: 104