Inventory investment appears to have a significant impact on the movement of aggregate output during business cycle contractions. Recent empirical evidence has raised doubts about the often used assumption of a buffer-stock/production-smoothing motivation for inventory. Work by Blinder and Maccini suggests that the use of an (S,s), or intermittent adjustment decision rule, better explains the stylized facts of the dynamics of inventory investment. This has led to the focus on the (S,s) as an alternative to production-smoothing. I assume that some agents use the (S,s) adjustment rule while others attempt to smooth production in the face of convex costs and uncertain demand. I simulate the interaction of heterogeneous agents (representing manufacturing, wholesale and retail agents) with different inventory decision rules to demonstrate that the stylized facts can be explained by a disaggregated model with vertical coupling between agents. The simulations find opposite aggregation bias effects for (S,s) agents than for production smoothing agents. In particular, aggregation horizontally across agents and/or temporally decreased the relative variability of production/ordering to sales for (S,s) agents while it increased the relative variability for production smoothing agents. The simulations also revealed synchronization by (S,s) agents when subjected to aggregate shocks. This may explain in some of the asymmetrical characteristics of the business cycle.
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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number
1994-029.
Length: Date of creation: 1994 Date of revision: Publication status: Published in Journal of Economic Behavior and Organization, January 1997 Handle: RePEc:fip:fedlwp:1994-029
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.:
Valerie A. Ramey & Kenneth D. West, 1997.
"Inventories,"
NBER Working Papers
6315, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Ramey, Valerie A. & West, Kenneth D., 1999.
"Inventories,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 13, pages 863-923
Elsevier.
[Downloadable!] (restricted)