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Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle

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  • Robert E. Carpenter

    (Emory University)

  • Steven M. Fazzari

    (Washington University and the Jerome Levy Economics Insititute)

  • Bruce C. Petersen

    (Washington University)

Abstract

A well-known but under-emphasized feature of the business cycle is that the flow of internal finance is highly procyclical. We argue that finance constraints lead firms to offset a large proportion of internal finance fluctuations through inventory (dis)investment. We construct three panels of quarterly firm data, each of which contains a large fraction of aggregate inventories and covers a major inventory cycle. Our findings show that the impact of internal finance on inventory investment is greater for small firms than large, consistent with the existence of finance constraints. Internal finance, however, is also economically important for large firms. These results explain part of the large cyclical amplitude of inventory investment. Furthermore, heterogeneity in our results across time, especially between the 1981-82 recession and the 1990-91 recession, helps explain differences in the composition of aggregate investment shortfalls during contractions.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 9401001.

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Length: 29 pages
Date of creation: 12 Jan 1994
Date of revision:
Handle: RePEc:wpa:wuwpma:9401001

Note: 2 word for windows binary files. File 1 has 29 pages text with one table enclosed. File 2 has 5 tables in 4 pages. 3 figures accompany this paper but are not enclosed. They are available upon request from Carpenter
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  1. Ramey, Valerie A, 1989. "Inventories as Factors of Production and Economic Fluctuations," American Economic Review, American Economic Association, vol. 79(3), pages 338-54, June.
  2. R. Glenn Hubbard & Anil K. Kashyap, 1991. "Internal net worth and the investment process: an application to U.S. agriculture," Working Paper Series, Macroeconomic Issues 91-27, Federal Reserve Bank of Chicago.
  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. George L. Perry & Charles L. Schultze, 1993. "Was This Recession Different? Are They All Different?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 145-212.
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  7. 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.
  8. Michael Devereux & Fabio Schiantarelli, 1990. "Investment, Financial Factors, and Cash Flow: Evidence from U.K. Panel Data," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 279-306 National Bureau of Economic Research, Inc.
  9. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
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  11. Alan S. Blinder, 1981. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," NBER Working Papers 0620, National Bureau of Economic Research, Inc.
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  13. Fair, Ray C., 1989. "The production-smoothing model is alive and well," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 353-370, November.
  14. 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.
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  18. Gertler, Mark & Gilchrist, Simon, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 309-40, May.
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  20. Dufour, Jean-Marie, 1993. "The importance of seasonality in inventory models," Journal of Econometrics, Elsevier, vol. 55(1-2), pages 129-133.
  21. 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.
  22. Whited, Toni M., 1991. "Investment and financial asset accumulation," Journal of Financial Intermediation, Elsevier, vol. 1(4), pages 307-334, December.
  23. Anil K. Kashyap & Owen A. Lamont & Jeremy C. Stein, 1993. "Credit conditions and the cyclical behavior of inventories," Working Paper Series, Macroeconomic Issues 93-7, Federal Reserve Bank of Chicago.
  24. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  25. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
  26. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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