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Microeconomic inventory adjustment and aggregate dynamics

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  • Jonathan McCarthy
  • Egon Zakrajsek

Abstract

We examine the microeconomic and aggregate inventory dynamics in the business sector of the U.S. economy. We employ high-frequency firm-level data and use an empirically tractable model, in which the aggregate dynamics are derived explicitly from the underlying microeconomic data. Our results show that the microeconomic adjustment function in both the manufacturing and trade sectors is nonlinear and asymmetric, results consistent with firms using (S,s)-type inventory policies. There are differences in the estimated adjustment functions between the two sectors as well as the durable and nondurable goods firms within each sector. The estimated adjustment function is remarkably stable across subperiods, indicating little change in the inventory adjustment process over time. As predicted by our model, higher moments of the cross-sectional distribution of inventory deviations affect aggregate inventory dynamics.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 54.

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Date of creation: 1998
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Handle: RePEc:fip:fednsr:54

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Keywords: Inventories ; Microeconomics ; Manufactures;

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  1. Andrew J. Filardo, 1995. "Recent evidence on the muted inventory cycle," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 27-43.
  2. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  3. Jonas D.M. Fisher & Andreas Hornstein, 1996. "(S, s) inventory policies in general equilibrium," Working Paper Series, Macroeconomic Issues WP-96-24, Federal Reserve Bank of Chicago.
  4. Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series 93-4, Board of Governors of the Federal Reserve System (U.S.).
  5. 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.
  6. 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.
  7. Caplin, Andrew S, 1985. "The Variability of Aggregate Demand with (S, s) Inventory Policies," Econometrica, Econometric Society, vol. 53(6), pages 1395-1409, November.
  8. Ricardo J. Caballero, 1991. "Durable Goods: An Explanation for Their Slow Adjustment," NBER Working Papers 3748, National Bureau of Economic Research, Inc.
  9. Krane, Spencer D, 1994. "The Distinction between Inventory Holding and Stockout Costs: Implications for Target Inventories, Asymmetric Adjustment, and the Effect of Aggregation on Production Smoothing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 117-36, February.
  10. Athanasios Episcopos, 1996. "Testing the (S,s) model of inventory investment with Canadian wholesale trade data," Applied Economics Letters, Taylor & Francis Journals, vol. 3(3), pages 193-195.
  11. Jonathan McCarthy & Egon Zakrajsek, 1998. "Trade inventories," Staff Reports 53, Federal Reserve Bank of New York.
  12. Krane, Spencer D & Braun, Stephen N, 1991. "Production Smoothing Evidence from Physical-Product Data," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 558-81, June.
  13. Paula R. Worthington, 1998. "The increasing importance of retailers' inventories," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 2-12.
  14. Ray C. Fair, 1989. "The Production Smoothing Model Is Alive and Well," Cowles Foundation Discussion Papers 896, Cowles Foundation for Research in Economics, Yale University.
  15. Egon Zakrajsek, 1997. "Retail inventories, internal finance, and aggregate fluctuations," Research Paper 9722, Federal Reserve Bank of New York.
  16. Donald S. Allen, 1995. "Changes in inventory management and the business cycle," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 17-26.
  17. Julio Rotemberg, 1987. "The New Keynesian Microfoundations," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 69-116 National Bureau of Economic Research, Inc.
  18. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
  19. Scott Schuh, 1996. "Evidence on the link between firm-level and aggregate inventory behavior," Finance and Economics Discussion Series 96-46, Board of Governors of the Federal Reserve System (U.S.).
  20. Michael C. Lovell, 1962. "Inventory Investment," Cowles Foundation Discussion Papers 131, Cowles Foundation for Research in Economics, Yale University.
  21. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1998. "Financing Constraints And Inventory Investment: A Comparative Study With High-Frequency Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 513-519, November.
  22. Trivedi, P. K., 1973. "Retail inventory investment behaviour," Journal of Econometrics, Elsevier, vol. 1(1), pages 61-80, March.
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Cited by:
  1. Paula R. Worthington, 1998. "Inventories and output volatility," Working Paper Series WP-98-21, Federal Reserve Bank of Chicago.
  2. C. Higson & S. Holly & P. Kattuman & S. Platis, 2004. "The Business Cycle, Macroeconomic Shocks and the Cross-Section: The Growth of UK Quoted Companies," Economica, London School of Economics and Political Science, vol. 71(281), pages 299-318, 05.
  3. Brown, Ward & Haegler, Urs, 2004. "Financing constraints and inventories," European Economic Review, Elsevier, vol. 48(5), pages 1091-1123, October.

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