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Inventories and the Business Cycle

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Author Info
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.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9306.

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Date of creation: Jun 1993
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Handle: RePEc:rba:rbardp:rdp9306

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  1. Lawrence J. Christiano & Martin Eichenbaum, 1987. "Temporal aggregation and the stock adjustment model of inventories," Working Papers 357, Federal Reserve Bank of Minneapolis. [Downloadable!]
  2. Edward C. Prescott, 1986. "Response to a skeptic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 28-33. [Downloadable!]
  3. Donald P. Morgan, 1991. "Will just-in-time inventory techniques dampen recessions?," Economic Review, Federal Reserve Bank of Kansas City, issue Mar, pages 21-33. [Downloadable!]
  4. Kahn, James A, 1992. "Why Is Production More Volatile Than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 481-510, May. [Downloadable!] (restricted)
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  5. Kenneth D. West, 1988. "Evidence From Seven Countries on Whether Inventories Smooth Aggregate Output," NBER Working Papers 2664, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Blinder, Alan S & Maccini, Louis J, 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. [Downloadable!] (restricted)
  7. Alan S. Blinder, 1984. "Can The Production Smoothing Model of Inventory Behavior be Saved?," NBER Working Papers 1257, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
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  1. Richard de Abreu Lourenco & Philip Lowe, 1994. "Demand Shocks, Inflation and the Business Cycle," RBA Research Discussion Papers rdp9411, Reserve Bank of Australia. [Downloadable!]
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