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Microeconomic inventory adjustment and aggregate dynamics

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  • J. McCarthy
  • E. Zakrajsek

Abstract

We examine microeconomic and aggregate inventory dynamics in the business sector of the U.S. economy. We employ high-frequency firm-level data and use an empirically tractable model, in which the aggregate dynamics are derived explicitly from the underlying microeconomic data. Our results show that the microeconomic adjustment function in both the manufacturing and trade sectors is nonlinear and asymmetric, results consistent with firms using (S,s)-type inventory policies. There are differences in the estimated adjustment functions between the two sectors as well as the durable and nondurable goods firms within each sector. The estimated adjustment function is remarkably stable across subperiods, indicating little change in the inventory adjustment process over time. As predicted by our model, higher moments of the cross-sectional distribution of inventory deviations affect aggregate inventory dynamics.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 63.

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Length: 58 pages
Date of creation: Mar 1999
Date of revision:
Handle: RePEc:bis:biswps:63

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  1. Jonas D.M. Fisher & Andreas Hornstein, 1998. "(S,s) Inventory policies in general equilibrium," Working Paper, Federal Reserve Bank of Richmond 97-07, Federal Reserve Bank of Richmond.
  2. Jonathan McCarthy & Egon Zakrajsek, 1998. "Trade inventories," Staff Reports, Federal Reserve Bank of New York 53, Federal Reserve Bank of New York.
  3. Spencer Krane & Steven Braun, 1990. "Production smoothing evidence from physical-product data," Working Paper Series / Economic Activity Section, Board of Governors of the Federal Reserve System (U.S.) 103, Board of Governors of the Federal Reserve System (U.S.).
  4. Gertler, Mark & Gilchrist, Simon, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(2), pages 309-40, May.
  5. Caballero, R.J., 1990. "Durable Goods: An Explanation For Their Slow Adjustment," Discussion Papers, Columbia University, Department of Economics 1990_49, Columbia University, Department of Economics.
  6. Egon Zakrajsek, 1997. "Retail inventories, internal finance, and aggregate fluctuations," Research Paper, Federal Reserve Bank of New York 9722, Federal Reserve Bank of New York.
  7. Ray C. Fair, 1989. "The Production Smoothing Model Is Alive and Well," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 896, Cowles Foundation for Research in Economics, Yale University.
  8. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
  9. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1998. "Financing Constraints And Inventory Investment: A Comparative Study With High-Frequency Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 513-519, November.
  10. Athanasios Episcopos, 1996. "Testing the (S,s) model of inventory investment with Canadian wholesale trade data," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 3(3), pages 193-195.
  11. Paula R. Worthington, 1998. "The increasing importance of retailers' inventories," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q III, pages 2-12.
  12. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 667-79, September.
  13. Donald S. Allen, 1995. "Changes in inventory management and the business cycle," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 17-26.
  14. Caplin, Andrew S, 1985. "The Variability of Aggregate Demand with (S, s) Inventory Policies," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1395-1409, November.
  15. Olivier J. Blanchard, 1982. "The Production and Inventory Behavior of the American Automobile Industry," NBER Working Papers 0891, National Bureau of Economic Research, Inc.
  16. Krane, Spencer D, 1994. "The Distinction between Inventory Holding and Stockout Costs: Implications for Target Inventories, Asymmetric Adjustment, and the Effect of Aggregation on Production Smoothing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 117-36, February.
  17. Julio Rotemberg, 1987. "The New Keynesian Microfoundations," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 69-116 National Bureau of Economic Research, Inc.
  18. Michael C. Lovell, 1962. "Inventory Investment," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 131, Cowles Foundation for Research in Economics, Yale University.
  19. Ramey, Valerie A. & West, Kenneth D., 1999. "Inventories," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 13, pages 863-923 Elsevier.
  20. Trivedi, P. K., 1973. "Retail inventory investment behaviour," Journal of Econometrics, Elsevier, Elsevier, vol. 1(1), pages 61-80, March.
  21. Andrew J. Filardo, 1995. "Recent evidence on the muted inventory cycle," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 27-43.
  22. Scott Schuh, 1996. "Evidence on the link between firm-level and aggregate inventory behavior," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 96-46, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. C. Higson & S. Holly & P. Kattuman & S. Platis, 2004. "The Business Cycle, Macroeconomic Shocks and the Cross-Section: The Growth of UK Quoted Companies," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 71(281), pages 299-318, 05.
  2. Brown, Ward & Haegler, Urs, 2004. "Financing constraints and inventories," European Economic Review, Elsevier, Elsevier, vol. 48(5), pages 1091-1123, October.
  3. Paula R. Worthington, 1998. "Inventories and output volatility," Working Paper Series, Federal Reserve Bank of Chicago WP-98-21, Federal Reserve Bank of Chicago.

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