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What Inventory Behavior Tells Us about Business Cycles

  • James A. Kahn
  • Mark Bils

The countercyclical pattern of inventory-sales ratios is a striking feature of inventory behavior. In a model where inventories are productive for sales, both the markup of price over marginal cost and expected changes in marginal cost are key determinants of that ratio. This paper argues that costly variation in factor utilization gives rise to countercyclical markups in production-to-stock manufacturing industries. Time markup turns out to be more important than intertemporal substitution in explaining the behavior of inventory-sales ratios.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 90 (2000)
Issue (Month): 3 (June)
Pages: 458-481

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Handle: RePEc:aea:aecrev:v:90:y:2000:i:3:p:458-481
Note: DOI: 10.1257/aer.90.3.458
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