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Inventory Cycles

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Author Info
Katsuyuki Shibayama ()

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Abstract

This paper investigates a rational dynamic stochastic general equilibrium model with a stockout constraint and a production chain. Our model shows that both stockout avoidance and cost shock mechanisms replicate stylised inventory facts -- production is more volatile than sales and inventory investment is procyclical. In addition, production smoothing also works at very high frequencies. Note that the cost shock and production smoothing mechanisms are naturally embedded in our micro-founded general equilibrium framework. Moreover, as a by-product, the production chain causes the slow adjustment of inventories in aggregate. Consequently, our model generates (a) high labour volatility and (b) low correlation between labour productivity and output; the standard RBC cannot produce these two empirical findings. Finally, our model yields inventory cycles.

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File URL: ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/0804.pdf
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Publisher Info
Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 0804.

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Date of creation: Feb 2008
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Handle: RePEc:ukc:ukcedp:0804

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
Phone: +44 (0)1227 764000
Fax: +44 (0)1227 827850
Web page: http://www.ukc.ac.uk/economics/

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Related research
Keywords: inventories; inventory cycles; stockout constraint; production chain; over-damped oscillations; dyanamic stochastic general equilibrium model;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Terry J. Fitzgerald, 1997. "Inventories and the business cycle: an overview," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 11-22. [Downloadable!]
  2. Andreas Hornstein & Pierre-Daniel Sarte, 2001. "Sticky prices and inventories : production smoothing reconsidered," Working Paper 01-06, Federal Reserve Bank of Richmond.
  3. Andrew B. Abel, 1985. "Inventories, Stock-Outs, and Production Smoothing," NBER Working Papers 1563, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Margaret M. McConnell & Gabriel Perez Quiros, 1998. "Output fluctuations in the United States: what has changed since the early 1980s?," Staff Reports 41, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  5. Andreas Hornstein, 1998. "Inventory investment and the business cycle," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 49-71. [Downloadable!]
  6. Wen, Yi, 2002. "Understanding the Inventory Cycle," Working Papers 02-04, Cornell University, Center for Analytic Economics. [Downloadable!]
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  7. Fisher, Jonas D M & Hornstein, Andreas, 2000. "(S, s) Inventory Policies in General Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 67(1), pages 117-45, January.
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  8. Basu, Susanto, 1996. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 719-51, August. [Downloadable!] (restricted)
    Other versions:
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