We evaluate two leading models of aggregate fluctuations with inventories in general equilibrium: the (S,s) model and the stockout avoidance model. Each is judged by its ability to explain the observed magnitude of inventories in the U.S. economy, alongside other empirical regularities such as the procyclicality of inventory investment and its positive correlation with sales. We find that the (S,s) model is far more consistent with the behavior of aggregate inventories in the postwar U.S. when aggregate fluctuations arise from technology, rather than preference, shocks. The converse holds for the stockout avoidance model. The (S,s) model performs well with respect to the inventory facts and other business cycle regularities. By contrast, the essential risk motive in the stockout avoidance model is insufficient to generate inventory holdings near the data without destroying the model’s performance elsewhere, suggesting a fundamental problem in using reduced-form inventory models with stocks rationalized by this motive.
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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number
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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.:
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.
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Valerie A. Ramey & Kenneth D. West, 1997.
"Inventories,"
NBER Working Papers
6315, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
King, Robert G. & Rebelo, Sergio T., 1999.
"Resuscitating real business cycles,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007
Elsevier.
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