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Inventories and Interest Rates: A Stage of Fabrication Approach

Listed author(s):
  • Bivin David G

    ()

    (Indiana University-Purdue University Indianapolis)

Maccini, Moore, and Schaller (2004, hereafter MMS) recently uncovered a long-run inverse relationship between interest rates and finished goods in a number of nondurables industries and the nondurables sector overall. Their primary innovation is a regime-switching model of the real interest rate. This paper extends that model to include work-in-process and raw material inventories as well as industries that produce to order. A cointegrating model similar to that of MMS is then estimated for all three types of inventories and all industries in both the durables and nondurables sectors. The results reinforce the MMS conclusion of a long-run inverse relationship between the real interest rate and finished goods during the 1967-1997 period. But the results for the durables sectors, work-in-process and raw materials, and the 1997-2007 period are generally much less supportive. Moreover, results for the manufacturing aggregates suggest that the overall responses are small.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 10 (2010)
Issue (Month): 1 (October)
Pages: 1-32

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Handle: RePEc:bpj:bejmac:v:10:y:2010:i:1:n:29
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  1. Brad R. Humphreys & Louis J. Maccini & Scott Schuh, 1997. "Input and output inventories," Working Papers 97-7, Federal Reserve Bank of Boston.
  2. Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 306-334, April.
  3. Kashyap, Anil K & Wilcox, David W, 1993. "Production and Inventory Control at the General Motors Corporation during the 1920's and 1930's," American Economic Review, American Economic Association, vol. 83(3), pages 383-401, June.
  4. René Garcia & Pierre Perron, 1995. "An Analysis of the Real Interest Rate Under Regime Shifts," CIRANO Working Papers 95s-05, CIRANO.
  5. Alan S. Blinder, 1986. "Can the Production Smoothing Model of Inventory Behavior be Saved?," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 431-453.
  6. Pantula, Sastry G & Gonzalez-Farias, Graciela & Fuller, Wayne A, 1994. "A Comparison of Unit-Root Test Criteria," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 449-459, October.
  7. Caballero, Ricardo J, 1994. "Small Sample Bias and Adjustment Costs," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 52-58, February.
  8. Hamilton, James D., 2002. "On the interpretation of cointegration in the linear-quadratic inventory model," Journal of Economic Dynamics and Control, Elsevier, vol. 26(12), pages 2037-2049, October.
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