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Inventories and the Business Cycle

Author

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  • Darren Flood

    (Reserve Bank of Australia)

  • Philip Lowe

    (Reserve Bank of Australia)

Abstract

This paper examines the relationship between the inventory cycle and the business cycle. It uses both macro-economic data and data from surveys of individual firms’ actual and expected inventory accumulation. It is argued that over the past decade and a half, the amplitude of the inventory cycle has been reduced. This reduction in amplitude reflects the decline in the stocks to sales ratio and the decline in the relative importance of unintended inventory investment. In part, these changes have been made possible by the application of increasingly sophisticated inventory management techniques. The paper also argues that the behaviour of inventories is consistent with demand shocks being a principal source of business cycle fluctuations. This is in contrast to a number of recent papers that have argued that shocks to the cost of production are the driving force of the inventory and output cycles. We find that demand factors dominate cost factors in explaining both expected and unexpected changes in inventory investment.

Suggested Citation

  • Darren Flood & Philip Lowe, 1993. "Inventories and the Business Cycle," RBA Research Discussion Papers rdp9306, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp9306
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    File URL: https://www.rba.gov.au/publications/rdp/1993/pdf/rdp9306.pdf
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    References listed on IDEAS

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    1. 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.
    2. Lawrence J. Christiano & Martin S. Eichenbaum, 1987. "Temporal aggregation and the stock adjustment model of inventories," Working Papers 357, Federal Reserve Bank of Minneapolis.
    3. Miron, Jeffrey A & Zeldes, Stephen P, 1988. "Seasonality, Cost Shocks, and the Production Smoothing Models of Inventories," Econometrica, Econometric Society, vol. 56(4), pages 877-908, July.
    4. Alan S. Blinder, 1986. "Can the Production Smoothing Model of Inventory Behavior be Saved?," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 431-453.
    5. West, Kenneth D., 1990. "Evidence from seven countries on whether inventories smooth aggregate output," Engineering Costs and Production Economics, Elsevier, vol. 19(1-3), pages 85-90, May.
    6. Kenneth D. West, 1990. "The Sources of Fluctuations in Aggregate Inventories and GNP," The Quarterly Journal of Economics, Oxford University Press, vol. 105(4), pages 939-971.
    7. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
    8. James A. Kahn, 1992. "Why is Production More Volatile than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 481-510.
    9. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
    10. Donald P. Morgan, 1991. "Will just-in-time inventory techniques dampen recessions?," Economic Review, Federal Reserve Bank of Kansas City, vol. 76(Mar), pages 21-33.
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    Cited by:

    1. H. Smith & J.n. Blignaut & J.h. Van Heerden, 2006. "An Analysis Of Inventory Investment In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 74(1), pages 6-19, March.
    2. Richard De Abreu Lourenco & Philip Lowe, 1994. "Demand Shocks, Inflation and the Business Cycle," RBA Research Discussion Papers rdp9411, Reserve Bank of Australia.

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