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Inventories and the business cycle: an equilibrium analysis of (S,s) policies

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  • Aubhik Khan
  • Julia K. Thomas

Abstract

The authors develop an equilibrium business cycle model in which final goods producers pursue generalized (S,s) inventory policies with respect to intermediate goods, a consequence of nonconvex factor adjustment costs. Calibrating their model to reproduce the average inventory-to-sales ratio in postwar U.S. data, the authors find that it explains half of the cyclical variability of inventory investment. Moreover, inventory accumulation is strongly procyclical, and production is more volatile than sales, as in the data. The comovement between inventory investment and final sales is often interpreted as evidence that inventories amplify aggregate fluctuations. However, the authors' model economy exhibits a business cycle similar to that of a comparable benchmark without inventories.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 02-20.

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Date of creation: 2002
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Handle: RePEc:fip:fedpwp:02-20

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Keywords: Inventories ; Business cycles;

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  30. Ramey, Valerie A, 1989. "Inventories as Factors of Production and Economic Fluctuations," American Economic Review, American Economic Association, vol. 79(3), pages 338-54, June.
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