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Markups, Aggregation, and Inventory Adjustment

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  • Daniele Coen-Pirani

Abstract

In this paper I suggest a unified explanation for two puzzles in the inventory literature: first, estimates of inventory speeds of adjustment in aggregate data are very small relative to the apparent rapid reaction of stocks to unanticipated variations in sales. Second, estimates of inventory speeds of adjustment in firm-level data are significantly higher than in aggregate data. The paper develops a multisector model where inventories are held to avoid stockouts, and price markups vary along the business cycle. The omission of countercyclical markup variations from inventory targets introduces a downward bias in estimates of adjustment speeds obtained from partial adjustment models. When the cyclicality of markups differs across sectors, this downward bias is shown to be more severe with aggregate rather than firm-level data. Similar results apply not only to inventories, but also to labor and prices. Montercarlo simulations of a calibrated version of the model suggest that these biases are quantitatively significant.

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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: 1328-1353

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Handle: RePEc:aea:aecrev:v:94:y:2004:i:5:p:1328-1353

Note: DOI: 10.1257/0002828043052376
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Cited by:
  1. Matteo Iacoviello & Fabio Schiantarelli & Scott Schuh, 2007. "Input and Output Inventories in General Equilibrium," Boston College Working Papers in Economics 658, Boston College Department of Economics, revised 23 Oct 2009.
  2. Tsoukalas, John, 2009. "Input and Output Inventories in the UK," MPRA Paper 18695, University Library of Munich, Germany.
  3. Wouter Den Haan, 2014. "Inventories and the Role of Goods-Market Frictions for Business Cycles," Discussion Papers 1402, Centre for Macroeconomics (CFM).
  4. Yi Wen, 2009. "Input and output inventory dynamics," Working Papers 2008-008, Federal Reserve Bank of St. Louis.
  5. Lin, Winston T. & Kao, Ta-Wei (Daniel), 2014. "The partial adjustment valuation approach with dynamic and variable speeds of adjustment to evaluating and measuring the business value of information technology," European Journal of Operational Research, Elsevier, vol. 238(1), pages 208-220.
  6. Zhiwei Xu & Yi Wen & pengfei Wang, 2012. "When Do Inventories Destabilize the Economy? ---A Tractable Approach to (S,s) Policies," 2012 Meeting Papers 288, Society for Economic Dynamics.
  7. Pengfei Wang & Yi Wen & Zhiwei Xu, 2011. "When do inventories destabilize the economy? an analytical approach to (S,s) policies," Working Papers 2011-014, Federal Reserve Bank of St. Louis.
  8. Yi Wen, 2008. "Inventories, liquidity, and the macroeconomy," Working Papers 2008-045, Federal Reserve Bank of St. Louis.

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