Working Paper

Is There News in Inventories?

Abstract: This paper identifies total factor productivity (TFP) news shocks using standard VAR methodology and documents a new stylized fact: in response to news about future increases in TFP, inventories rise and comove positively with other major macroeconomic aggregates. The authors show that the standard theoretical model used to capture the effects of news shocks cannot replicate this fact when extended to include inventories. To explain the empirical inventory behavior, they develop a framework that relies on the presence of knowledge capital accumulated through a learning-by-doing process. The desire to take advantage of higher future TFP through knowledge capital drives output and hours choices on the arrival of news and leads to inventory accumulation alongside other macroeconomic variables. The broad-based comovement the authors document supports the view that news shocks are an important driver of aggregate fluctuations.

Keywords: News shocks; business cycles; inventories; knowledge capital; VAR;

JEL Classification: E2; E3;

https://doi.org/10.21144/wp20-03

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Working Paper

Publication Date: 2020-05-08

Number: 20-03