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What inventory behavior tells us about business cycles

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  • Mark Bils
  • James A. Kahn

Abstract

Manufacturers' finished goods inventories are less cyclical than shipments. This requires marginal cost to be more procyclical than is conventionally measured. In this paper, alternative marginal cost measures for six manufacturing industries are constructed. These measures, which attribute high-frequency productivity shocks to procyclical work effort, are more successful in accounting for inventory behavior. Evidence is also provided that the short-run slope of marginal cost arising from convexity of the production function is close to zero for five of the six industries. The paper concludes that countercyclical markups arising from a procyclical shadow price of labor are chiefly responsible for the sluggishness of inventories.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 92.

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Date of creation: 1999
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Handle: RePEc:fip:fednsr:92

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Keywords: Inventories ; Business cycles;

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