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Input and Output Inventory Dynamics

  • Yi Wen
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This paper develops an analytically tractable general equilibrium model of inventory dynamics based on a precautionary stockout-avoidance motive. The model's predictions are broadly consistent with the US business cycle and key features of inventory behavior. It is also shown that technological improvement of inventory management can increase, rather than decrease, the volatility of aggregate output. Key to this seemingly counterintuitive result is that a stockout-avoidance motive leads to a procyclical shadow value of inventories, which acts as an automatic stabilizer that discourages sales in booms and encourages demand in recessions, thereby reducing the variability of GDP. (JEL D92, E22, E23, E32, G31)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.4.181
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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 3 (2011)
Issue (Month): 4 (October)
Pages: 181-212

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Handle: RePEc:aea:aejmac:v:3:y:2011:i:4:p:181-212
Note: DOI: 10.1257/mac.3.4.181
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