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Inventory Investment and the Real Interest Rate

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  • Junayed, Sadaquat
  • Khan, Hashmat

Abstract

The relationship between inventory investment and the real interest rate has been difficult to assess empirically. Recent work has proposed a linear-quadratic inventory model with time-varying discount factor to identify the effects of real interest rate on inventory investment. The authors show that this framework does not separately identify the effects of real interest rate on inventory investment from variables that determine the expected marginal cost of production. Consequently, understanding the relationship between inventory investment and the real interest rate continues to be a challenge for macroeconomists. --

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Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2009-23.

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Date of creation: 2009
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Handle: RePEc:zbw:ifwedp:7587

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Keywords: Inventory investment; real interest rate;

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  1. Valerie A. Ramey & Kenneth D. West, 1997. "Inventories," NBER Working Papers 6315, National Bureau of Economic Research, Inc.
  2. Eichenbaum, Martin, 1989. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 853-64, September.
  3. Miron, Jeffrey A & Zeldes, Stephen P, 1988. "Seasonality, Cost Shocks, and the Production Smoothing Models of Inventories," Econometrica, Econometric Society, Econometric Society, vol. 56(4), pages 877-908, July.
  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, MIT Press, vol. 107(2), pages 481-510, May.
  5. Mark Bils & James Kahn, 1998. "What inventory behavior tells us about business cycles," Research Paper, Federal Reserve Bank of New York 9817, Federal Reserve Bank of New York.
  6. Louis J. Maccini & Bartholomew J. Moore & Huntley Schaller, 2004. "The Interest Rate, Learning, and Inventory Investment," American Economic Review, American Economic Association, American Economic Association, vol. 94(5), pages 1303-1327, December.
  7. Akhtar, M A, 1983. "Effects of Interest Rates and Inflation on Aggregate Inventory Investment in the United States," American Economic Review, American Economic Association, American Economic Association, vol. 73(3), pages 319-28, June.
  8. Ramey, Valerie A, 1989. "Inventories as Factors of Production and Economic Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 338-54, June.
  9. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 5(1), pages 73-96, Winter.
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