Advanced Search
MyIDEAS: Login to save this paper or follow this series

Modelling the behaviour of U.S. Inventories: A Cointegration-Euler Approach

Contents:

Author Info

  • Claus, I.

Abstract

Cyclical contractions are often referred to as inventory cycles, in part because movements in inventories can amplify cyclical fluctuations in output. An unanticipated slowing in demand generally leads to an unintended buildup of inventories: only with a lag do firms adjust production and their actual holding of inventories relative to the desired level. A possible explanation for this accumulation is that the costs of adjusting inventory holdings outweigh the disequilibrium costs, i.e., the cost of temporarily deviating from the equilibrium level of inventories. In this paper, the relative importance of the disequilibrium costs to adjustment costs of inventories is evaluated. An estimate of the rate of inventory adjustment towards its long-run equilibrium level is provided in the United States by means of a linear-quadratic model with integrated processes. A limited-information approach allows the time-series properties of the data to be exploited and consistent estimates of the structural parameters of the Euler equation obtained. Evidence is provided that the actual level of U.S. inventories was generally above the target level during the past six recession periods and that inventories fell below their desired level following an economic downturn. Furthermore, the actual level of inventories appears to have been at desired levels between the 1960 and the 1969-70 recessions and since the last recession in 1990­1991--two periods of sustained economic growth. These findings support the view that inventory imbalances can amplify the business cycle. The empirical estimates also imply that adjustment costs are substantially more important than disequilibrium costs. The estimate of the speed of adjustment suggests that firms adjust their holdings of inventories slowly as it takes about a year for 95 per cent of the adjustment of the actual level to the target level to be completed.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/05/wp97-19.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 97-19.

as in new window
Length: 33 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:bca:bocawp:97-19

Contact details of provider:
Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/

Related research

Keywords: International topics;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Olivier J. Blanchard, 1982. "The Production and Inventory Behavior of the American Automobile Industry," NBER Working Papers 0891, National Bureau of Economic Research, Inc.
  2. Christiano, Lawrence J. & Eichenbaum, Martin, 1987. "Temporal aggregation and structural inference in macroeconomics," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 26(1), pages 63-130, January.
  3. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  4. Eichenbaum, Martin S., 1984. "Rational expectations and the smoothing properties of inventories of finished goods," Journal of Monetary Economics, Elsevier, vol. 14(1), pages 71-96, July.
  5. Robert A. Amano, 1995. "Empirical Evidence on the Cost of Adjustment and Dynamic Labour Demand," Macroeconomics 9505001, EconWPA.
  6. Alan S. Blinder, 1986. "More on the Speed of Adjustment in Inventory Models," NBER Working Papers 1913, National Bureau of Economic Research, Inc.
  7. Donald S. Allen, 1995. "Changes in inventory management and the business cycle," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 17-26.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Marwan Chacra & Maral Kichian, 2004. "A Forecasting Model for Inventory Investments in Canada," Working Papers 04-39, Bank of Canada.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:97-19. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.