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Production and Inventory Behavior of Capital

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  • Yi Wen

    (Research Department, Federal Reserve Bank of St. Louis)

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Abstract

This paper provides a dynamic optimization model of durable goods inventories to study the interactions between investment demand and the production of capital goods. There are three major findings: first, capital suppliers¡¯ inventory behavior makes investment demand more volatile in equilibrium; second, equilibrium price of capital is characterized by downward stickiness; and third, the responses of the capital market to interest rate and other environmental changes are asymmetric. All are the result of equilibrium interactions between demand and supply.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 8 (2007)
Issue (Month): 1 (May)
Pages: 95-112

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Handle: RePEc:cuf:journl:y:2007:v:8:i:1:p:95-112

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Keywords: Investment; Capital theory; Capital supply; Inventory; Durable goods;

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  1. Maccini, Louis J & Zabel, Edward, 1996. "Serial Correlation in Demand, Backlogging and Production Volatility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 423-52, May.
  2. Blinder, Alan S, 1986. "Can the Production Smoothing Model of Inventory Behavior Be Saved?," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 431-53, August.
  3. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1999. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Econometrica, Econometric Society, vol. 67(4), pages 783-826, July.
  4. Olivier J. Blanchard, 1982. "The Production and Inventory Behavior of the American Automobile Industry," NBER Working Papers 0891, National Bureau of Economic Research, Inc.
  5. Eichenbaum, Martin, 1989. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," American Economic Review, American Economic Association, vol. 79(4), pages 853-64, September.
  6. Andrew B. Abel & Avinash K. Dixit & Janice B. Eberly & Robert S. Pindyck, . "Options, the Value of Capital, and Investment," Rodney L. White Center for Financial Research Working Papers 15-95, Wharton School Rodney L. White Center for Financial Research.
  7. Fisher, J.D.M. & Hornstein, A., 1995. "(S,s)Inventory Policies in General Equilibrium," UWO Department of Economics Working Papers 9514, University of Western Ontario, Department of Economics.
  8. Julia K. Thomas, 2002. "Is Lumpy Investment Relevant for the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 508-534, June.
  9. Kahn, James A, 1992. "Why Is Production More Volatile Than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 481-510, May.
  10. Abel, Andrew B, 1985. "Inventories, Stock-Outs and Production Smoothing," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 283-93, April.
  11. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  12. Valerie A. Ramey & Kenneth D. West, 1997. "Inventories," NBER Working Papers 6315, National Bureau of Economic Research, Inc.
    • Ramey, Valerie A. & West, Kenneth D., 1999. "Inventories," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 13, pages 863-923 Elsevier.
  13. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, vol. 72(3), pages 334-48, June.
  14. Andrew B. Abel & Janice C. Eberly, 1993. "A Unified Model of Investment Under Uncertainty," NBER Working Papers 4296, National Bureau of Economic Research, Inc.
  15. Wen, Yi, 2002. "Understanding the Inventory Cycle," Working Papers 02-04, Cornell University, Center for Analytic Economics.
  16. Martin Feldstein & Alan Auerbach, 1976. "Inventory Behavior in Durable-Goods Manufacturing: The Target-Adjustment Model," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(2), pages 351-408.
  17. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
  18. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  19. Kenneth D. West, 1985. "A Variance Bounds Test of the Linear Quardractic Inventory Model," NBER Working Papers 1581, National Bureau of Economic Research, Inc.
  20. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  21. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
  22. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
  23. Amihud, Yakov & Mendelson, Haim, 1983. "Price Smoothing and Inventory," Review of Economic Studies, Wiley Blackwell, vol. 50(1), pages 87-98, January.
  24. Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 306-34, April.
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