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Inventory Cycles and Business Cycles – Has the relationship lost its importance over the years: A Time-Varying Parameter Approach using U.S. Data

Author

Listed:
  • Parijat Maitra

    (IIM-A)

  • Naveen Srinivasan

    ((Corresponding author) Professor, Madras School of Economics, Chennai, India)

Abstract

Despite widespread recognition that fluctuations in inventories are one of the primary drivers of business cycles and the introduction of Just-In-Time (JIT) Production system in the 1980s has resulted in declining inventory to sales ratio, suggesting that the role of inventories in generating business cycles may be diminishing, surprisingly very little empirical work has been done to investigate how this relationship has varied over the years. In this study we use U.S. Business cycle and Inventory to sales ratio data from 1967 Q1 to 1996 Q4 and estimate their relationship in a Time-Varying Parameter framework. We find that the importance of inventory cycles w.r.t business cycles has declined over the years, with multiple structural breaks observed in the 1970s and the 1980s. However, our estimates also show that despite the decline in the strength of the relationship, fluctuations in inventories are still an important factor in business cycles, particularly in recessions.

Suggested Citation

  • Parijat Maitra & Naveen Srinivasan, 2020. "Inventory Cycles and Business Cycles – Has the relationship lost its importance over the years: A Time-Varying Parameter Approach using U.S. Data," Working Papers 2020-198, Madras School of Economics,Chennai,India.
    • Handle: RePEc:mad:wpaper:2020-198
    as

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    References listed on IDEAS

    as
    1. Blinder, Alan S & Maccini, Louis J, 1991. "The Resurgence of Inventory Research: What Have We Learned?," Journal of Economic Surveys, Wiley Blackwell, vol. 5(4), pages 291-328.
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    4. Ramey, Valerie A & Vine, Daniel J, 2004. "Why Do Real and Nominal Inventory-Sales Ratios Have Different Trends?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 959-963, October.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Inventory to Sales Ratios; Inventory; Business Cycles; Trend Breaks;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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