Working Paper

Inventories and the business cycle: an equilibrium analysis of (S,s) policies.

Abstract: The authors develop an equilibrium business cycle model in which final goods producers pursue generalized (S,s) inventory policies with respect to intermediate goods, a consequence of nonconvex factor adjustment costs. Calibrating their model to reproduce the average inventory-to-sales ratio in postwar U.S. data, the authors find that it explains half of the cyclical variability of inventory investment. Moreover, inventory accumulation is strongly procyclical, and production is more volatile than sales, as in the data. The comovement between inventory investment and final sales is often interpreted as evidence that inventories amplify aggregate fluctuations. However, the authors' model economy exhibits a business cycle similar to that of a comparable benchmark without inventories.

Keywords: Inventories; Business cycles;

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2002

Number: 02-20