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The Interest Rate, Learning, and Inventory Investment

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  • Louis J. Maccini
  • Bartholomew J. Moore
  • Huntley Schaller

Abstract

This paper presents a model that provides an explanation, based on regime switching in the real interest rate and learning, of why tests based on stock adjustment models, Euler equations, or decision rules—which emphasize short-run fluctuations in inventories and the interest rate—are unlikely to uncover a negative relationship between inventories and the real interest rate. The model, however, predicts that inventories will respond to long-run movements, that is, to regime shifts in the real interest rate. Tests emphasizing cointegration techniques confirm this prediction and show a significant long-run relationship between inventories and the real interest rate.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/0002828043052295
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File URL: http://www.aeaweb.org/aer/data/dec04_data_schaller.zip
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 94 (2004)
Issue (Month): 5 (December)
Pages: 1303-1327

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Handle: RePEc:aea:aecrev:v:94:y:2004:i:5:p:1303-1327

Note: DOI: 10.1257/0002828043052295
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References

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  35. Maccini, Louis J & Rossana, Robert J, 1984. "Joint Production, Quasi-Fixed Factors of Production, and Investement in Finished Goods Inventories," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(2), pages 218-36, May.
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Citations

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Cited by:
  1. Schaller, Huntley, 2006. "Econometric Issues in Estimating User Cost Elasticity," Economics Series 194, Institute for Advanced Studies.
  2. Thomas A. Lubik & Wing Leong Teo, 2009. "Inventories and optimal monetary policy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 357-382.
  3. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 155-80, Fall.
  4. Jones, Christopher S. & Tuzel, Selale, 2013. "Inventory investment and the cost of capital," Journal of Financial Economics, Elsevier, vol. 107(3), pages 557-579.
  5. Junayed, Sadaquat & Khan, Hashmat, 2009. "Inventory Investment and the Real Interest Rate," Economics Discussion Papers 2009-23, Kiel Institute for the World Economy.
  6. Daniel Leigh, 2005. "Estimating the Implicit Inflation Target," IMF Working Papers 05/77, International Monetary Fund.
  7. Jason Barr, 2011. "Skyscrapers and Skylines: New York and Chicago, 1885-2007," Working Papers Rutgers University, Newark 2011-001, Department of Economics, Rutgers University, Newark.

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