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Production and Inventory Behavior of Capital

  • Yi Wen

    (Research Department, Federal Reserve Bank of St. Louis)

Registered author(s):

This paper provides a dynamic optimization model of durable goods inventories to study the interactions between investment demand and the production of capital goods. There are three major findings: first, capital suppliers¡¯ inventory behavior makes investment demand more volatile in equilibrium; second, equilibrium price of capital is characterized by downward stickiness; and third, the responses of the capital market to interest rate and other environmental changes are asymmetric. All are the result of equilibrium interactions between demand and supply.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 8 (2007)
Issue (Month): 1 (May)
Pages: 95-112

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Handle: RePEc:cuf:journl:y:2007:v:8:i:1:p:95-112
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  1. Valerie A. Ramey & Kenneth D. West, 1997. "Inventories," NBER Working Papers 6315, National Bureau of Economic Research, Inc.
    • Ramey, Valerie A. & West, Kenneth D., 1999. "Inventories," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 13, pages 863-923 Elsevier.
  2. Abel, Andrew B & Eberly, Janice C, 1994. "A Unified Model of Investment under Uncertainty," American Economic Review, American Economic Association, vol. 84(5), pages 1369-84, December.
  3. Andrew B. Abel, 1985. "Inventories, Stock-Outs and Production Smoothing," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 283-293.
  4. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1999. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Econometrica, Econometric Society, vol. 67(4), pages 783-826, July.
  5. Abel, Andrew B., 1952-, 1995. "Options, the value of capital, and investment," Working papers 3843-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  6. Alan S. Blinder, 1984. "Can The Production Smoothing Model of Inventory Behavior be Saved?," NBER Working Papers 1257, National Bureau of Economic Research, Inc.
  7. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  8. Olivier J. Blanchard, 1982. "The Production and Inventory Behavior of the American Automobile Industry," NBER Working Papers 0891, National Bureau of Economic Research, Inc.
  9. Wen, Yi, 2005. "Understanding the inventory cycle," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1533-1555, November.
  10. Martin S. Eichenbaum, 1988. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," NBER Working Papers 2523, National Bureau of Economic Research, Inc.
  11. Julia K. Thomas, . "Is Lumpy Investment Relevant for the Business Cycle?," GSIA Working Papers 1998-E250, Carnegie Mellon University, Tepper School of Business.
  12. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
  13. Jonas D.M. Fisher & Andreas Hornstein, 1996. "(S, s) inventory policies in general equilibrium," Working Paper Series, Macroeconomic Issues WP-96-24, Federal Reserve Bank of Chicago.
  14. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  15. Yakov Amihud & Haim Mendelson, 1983. "Price Smoothing and Inventory," Review of Economic Studies, Oxford University Press, vol. 50(1), pages 87-98.
  16. West, Kenneth D, 1986. "A Variance Bounds Test of the Linear Quadratic Inventory Model," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 374-401, April.
  17. 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.
  18. James A. Kahn, 1992. "Why is Production More Volatile than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 481-510.
  19. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 753-777.
  20. Alan S. Blinder, 1981. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," NBER Working Papers 0620, National Bureau of Economic Research, Inc.
  21. Maccini, Louis J & Zabel, Edward, 1996. "Serial Correlation in Demand, Backlogging and Production Volatility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 423-52, May.
  22. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
  23. Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 306-34, April.
  24. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  25. Martin Feldstein & Alan Auerbach, 1976. "Inventory Behavior in Durable-Goods Manufacturing: The Target-Adjustment Model," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(2), pages 351-408.
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