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EXPLAINING INVENTORIES: A BUSINESS CYCLE ASSESSMENT OF THE STOCKOUT AVOIDANCE AND (S,s) MOTIVES

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  • KHAN, AUBHIK
  • THOMAS, JULIA K.

Abstract

We evaluate two leading explanations for inventories, the (S,s) and stockout avoidance motives, examining each within dynamic stochastic general equilibrium environments. We find that the (S,s) model is far more consistent with the cyclical behavior of aggregate inventories in the postwar United States when fluctuations arise from technology shocks, rather than preference shocks, whereas the converse is true for the stockout avoidance model. The (S,s) model succeeds in explaining the average magnitude of inventories in the U.S. economy and in reproducing the cyclical regularities involving inventories and other aggregate series. The stockout avoidance model does not. Even with idiosyncratic risk added to strengthen it, the stockout avoidance motive is insufficient to generate stocks near the data without destroying model performance along other important margins. Moreover, it appears incapable of sustaining inventories alongside capital. These findings suggest a fundamental flaw in reduced-form inventory models where stocks are loosely rationalized by this motive.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 11 (2007)
Issue (Month): 05 (November)
Pages: 638-664

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Handle: RePEc:cup:macdyn:v:11:y:2007:i:05:p:638-664_06

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Cited by:
  1. Leonardo Auernheimer & Danilo Trupkin, 2014. "The Role of Inventories and Capacity Utilization as Shock Absorbers," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 70-85, January.
  2. Hyunseung Oh & Nicolas Crouzet, 2013. "Can news shocks account for the business-cycle dynamics of inventories?," 2013 Meeting Papers 504, Society for Economic Dynamics.
  3. Yi Wen, 2008. "Inventories, liquidity, and the macroeconomy," Working Papers 2008-045, Federal Reserve Bank of St. Louis.
  4. George Alessandria & Joseph Kaboski & Virgiliu Midrigan, 2012. "Trade Wedges, Inventories, and International Business Cycles," NBER Working Papers 18191, National Bureau of Economic Research, Inc.
  5. Oleksiy Kryvtsov & Virgiliu Midrigan, 2009. "Inventories, Markups, and Real Rigidities in Menu Cost Models," Working Papers 09-6, Bank of Canada.
  6. Yi Wen, 2011. "Input and output inventory dynamics," Working Papers 2011-008, Federal Reserve Bank of St. Louis.
  7. Fernandez-Corugedo, Emilio & McMahon, Michael & Millard, Stephen & Rachel, Lukasz, 2011. "Understanding the macroeconomic effects of working capital in the United Kingdom," Bank of England working papers 422, Bank of England.
  8. George Alessandria & Joseph Kaboski & Virgiliu Midrigan, 2008. "Inventories, Lumpy Trade, and Large Devaluations," NBER Working Papers 13790, National Bureau of Economic Research, Inc.

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