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The multiplier: a general equilibrium analysis of multi-stage-fabrication economy with inventories

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Yi Wen

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Abstract

This paper provides a general equilibrium multi-stage production model to explain the co-existence and co-movement of output- and input-inventories. The model offers a neoclassical perspective on the propagation mechanism of demand uncertainty. It reveals that uncertainty in demand at downstream can be transmitted and amplified towards upstream by inventory investment at all stages of production via input-output linkages, leading to a chain-multiplier effect on aggregate output and employment. The model is capable of explaining several long-standing puzzles of the business cycle associated with inventories.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-046.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2005-046

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Keywords: Business cycles ; Production (Economic theory) ; Investments;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Blanchard, Olivier J, 1983. "The Production and Inventory Behavior of the American Automobile Industry," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 365-400, June. [Downloadable!] (restricted)
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  2. Angus Deaton & Guy Laroque, 1990. "On The Behavior of Commodity Prices," NBER Working Papers 3439, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Zabel, Edward, 1972. "Multiperiod monopoly under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 524-536, December. [Downloadable!] (restricted)
  4. Zabel, E, 1970. "Monopoly and Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 37(2), pages 205-19, April. [Downloadable!] (restricted)
  5. Valerie A. Ramey & Kenneth D. West, 1997. "Inventories," NBER Working Papers 6315, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    • 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)
  6. Humphreys, Brad R. & Maccini, Louis J. & Schuh, Scott, 2001. "Input and output inventories," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 347-375, April. [Downloadable!] (restricted)
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  7. 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, vol. 37(2), pages 423-52, May.
  8. 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. [Downloadable!] (restricted)
  9. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September. [Downloadable!] (restricted)
  10. Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 306-34, April. [Downloadable!] (restricted)
  11. Andrew B. Abel, 1985. "Inventories, Stock-Outs, and Production Smoothing," NBER Working Papers 1563, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. 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(1976-2), pages 351-408. [Downloadable!]
  13. Blinder, Alan S & Maccini, Louis J, 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. [Downloadable!] (restricted)
  14. Mark Bils & James Kahn, 1998. "What inventory behavior tells us about business cycles," Research Paper 9817, Federal Reserve Bank of New York. [Downloadable!]
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  15. Blinder, Alan S, 1986. "Can the Production Smoothing Model of Inventory Behavior Be Saved?," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 431-53, August. [Downloadable!] (restricted)
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  16. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, vol. 72(3), pages 334-48, June. [Downloadable!] (restricted)
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  17. Eichenbaum, Martin, 1989. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," American Economic Review, American Economic Association, vol. 79(4), pages 853-64, September. [Downloadable!] (restricted)
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  18. Amihud, Yakov & Mendelson, Haim, 1983. "Price Smoothing and Inventory," Review of Economic Studies, Blackwell Publishing, vol. 50(1), pages 87-98, January. [Downloadable!] (restricted)
  19. Scheinkman, Jose A & Schechtman, Jack, 1983. "A Simple Competitive Model with Production and Storage," Review of Economic Studies, Blackwell Publishing, vol. 50(3), pages 427-41, July. [Downloadable!] (restricted)
  20. West, Kenneth D, 1986. "A Variance Bounds Test of the Linear Quadratic Inventory Model," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 374-401, April. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Matteo Iacoviello & Fabio Schiantarelli & Scott Schuh, 2007. "Input and output inventories in general equilibrium," Working Papers 07-16, Federal Reserve Bank of Boston. [Downloadable!]
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