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General Equilibrium Analysis of the Supply of Capital

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  • Wen, Yi

    (Cornell U)

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Abstract

The point of this paper is that if output is durable then optimal behavior of a supplier is characterized by production smoothing. Durability of goods (such as capital) has opposite effects on the supply of the goods. Higher durability on the one hand raises the variability of investment demand for the goods by lowering the user's cost, which tends to raise the variability of supply; on the other hand it lowers the expected future demand for the goods, which tends to reduce the variability of supply. These opposite effects of durability manifest in economies where suppliers of durable goods opt to use inventories to buffer demand shocks. Due to inventory adjustment and rational expectation, the variability of production can be reduced both absolutely and relative to sales if output is durable.

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Bibliographic Info

Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 04-02.

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Date of creation: Jan 2004
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Handle: RePEc:ecl:corcae:04-02

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  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. Fisher, J.D.M. & Hornstein, A., 1995. "(S,s)Inventory Policies in General Equilibrium," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 9514, University of Western Ontario, Department of Economics.
  3. 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.
  4. Martin S. Eichenbaum, 1988. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," NBER Working Papers 2523, National Bureau of Economic Research, Inc.
  5. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, American Economic Association, vol. 72(3), pages 334-48, June.
  6. 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, MIT Press, vol. 107(2), pages 481-510, May.
  7. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1996. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 12, Centro de Economía Aplicada, Universidad de Chile.
  8. Abel, Andrew B, 1985. "Inventories, Stock-Outs and Production Smoothing," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(2), pages 283-93, April.
  9. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 247-280.
  10. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  11. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 423-52, May.
  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. Amihud, Yakov & Mendelson, Haim, 1983. "Price Smoothing and Inventory," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(1), pages 87-98, January.
  14. 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.
  15. Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(2), pages 306-34, April.
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