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Durable good inventories and the volatility of production: explaining the less volatile U.S. economy

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  • Yi Wen
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Abstract

This paper provides a simple dynamic optimization model of durable goods inventories. Closed-form solutions are derived in a general equilibrium environment with imperfect information and serially correlated shocks. The model is then applied to scrutinize some popular conjectures regarding the causes of the volatility reduction of GDP since 1984.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-047.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2005-047

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Keywords: Investments ; Production (Economic theory);

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References

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  1. Chang-Jin Kim & Charles Nelson & Jeremy M. Piger, 2003. "The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations," Working Papers 2001-016, Federal Reserve Bank of St. Louis.
  2. Wen, Yi, 2005. "Understanding the inventory cycle," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1533-1555, November.
  3. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  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. Amihud, Yakov & Mendelson, Haim, 1983. "Price Smoothing and Inventory," Review of Economic Studies, Wiley Blackwell, vol. 50(1), pages 87-98, January.
  6. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  7. James A. Kahn & Mark Bils, 2000. "What Inventory Behavior Tells Us about Business Cycles," American Economic Review, American Economic Association, vol. 90(3), pages 458-481, June.
  8. 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.
  9. Alan S. Blinder, 1981. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," NBER Working Papers 0620, National Bureau of Economic Research, Inc.
  10. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  11. Margaret M. McConnell & Gabriel Perez Quiros, 1998. "Output fluctuations in the United States: what has changed since the early 1980s?," Staff Reports 41, Federal Reserve Bank of New York.
  12. 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.
  13. Chow, Gregory C., 1997. "Dynamic Economics: Optimization by the Lagrange Method," OUP Catalogue, Oxford University Press, number 9780195101928, September.
  14. 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.
  15. Valerie A. Ramey & Daniel J. Vine, 2005. "Tracking the source of the decline in GDP volatility: an analysis of the automobile industry," Finance and Economics Discussion Series 2005-14, Board of Governors of the Federal Reserve System (U.S.).
  16. 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.
  17. Abel, Andrew B, 1985. "Inventories, Stock-Outs and Production Smoothing," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 283-93, April.
  18. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
  19. 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.
  20. 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.
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Cited by:
  1. Wen, Yi, 2002. "Understanding the Inventory Cycle," Working Papers 02-04, Cornell University, Center for Analytic Economics.
  2. Matteo Iacoviello & Fabio Schiantarelli & Scott Schuh, 2011. "Input And Output Inventories In General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(4), pages 1179-1213, November.

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