How Expectations About Future Productivity Drive Inventories

Abstract: To what extent do expectations about future productivity developments drive business cycles? This Economic Brief reviews the state of the literature and discusses how new research by the authors establishes a novel method to answer. We specifically focus on firms' inventories, which stock goods available for future sales. We find that these inventories expand strongly to news about future productivity developments. This confirms that expectations about future productivity are a powerful force behind aggregate fluctuations, a finding with important implications for widely used economic models.

Keywords: business cycles; productivity; news;

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Richmond Fed Economic Brief

Publication Date: 2022-03

Volume: 22

Issue: 03