We review and interpret recent work on inventories, emphasizing empirical and business cycle aspects. We begin by documenting two empirical regularities about inventories. The first is the well-known one that inventories move procyclically. The second is that inventory movements are quite persistent, even conditional on sales. To consider explanations for the two facts, we present a linear-quadratic model. The model can rationalize the two facts in many ways, but two stylized explanations are simple enough and have support support from a number of papers. Both assume that there are persistent shocks to demand for the good in question, and that marginal production cost slopes up. The first explanation assumes as well that there are highly persistent shocks to the cost of production. The second assumes that there are strong costs of adjusting production and a strong accelerator motive. Research to to date, however, has not reached a consensus on whether one of these two, or some third, alternative provides a satisfactory explanation of inventory behavior. We suggest several directions for future research that promise to improve our understanding of inventory behavior and thus of business cycles.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6315.
Length: Date of creation: Dec 1997 Date of revision: Publication status: published as Handbook of Macroeconomics, Taylor, John and Michael Woodford, eds., Amsterdam: North Holland, 1999, Vol.1B Handle: RePEc:nbr:nberwo:6315
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Chapter
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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Find related papers by JEL classification: E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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