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Inventories, Stockouts, and ToTEM

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  • Oleksiy Kryvtsov
  • Yang Zhang
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    Abstract

    Inventory investment is an important component of the Canadian business cycle. Despite its small average size – less than 1 per cent of output -- it exhibits volatile procyclical fluctuations, accounting for almost one-third of output variance. Procyclicality of inventories is somewhat smaller than that of sales, resulting in a counter-cyclical aggregate inventory-sales ratio. These salient inventory facts are matched in a partialequilibrium version of Kryvtsov and Midrigan’s (2010) model in which firms hold stocks of goods to buffer against stockouts. In booms, firms boost their inventories to avoid stocking out due to the rise in demand. The model combines the real marginal cost estimated by ToTEM with the convex cost of adjusting inventories to match the dynamics of the inventory-sales ratio in the data.

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    File URL: http://www.bankofcanada.ca/en/res/dp/2010/dp10-8.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Discussion Papers with number 10-8.

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    Length: 29 pages
    Date of creation: 2010
    Date of revision:
    Handle: RePEc:bca:bocadp:10-8

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    Related research

    Keywords: Business fluctuations and cycles; Transmission of monetary policy;

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    1. Aguirregabiria, Victor, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 275-308, April.
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