IDEAS home Printed from https://ideas.repec.org/a/eee/dyncon/v53y2015icp290-313.html
   My bibliography  Save this article

Inventory behavior with permanent sales shocks

Author

Listed:
  • Maccini, Louis J.
  • Moore, Bartholomew
  • Schaller, Huntley

Abstract

Empirically, ADF tests fail to reject the null hypothesis that sales are I(1). We build a model of inventory behavior that incorporates permanent sales shocks. Analytically, the model with I(1) sales implies that the variance ratio (of log production to log sales) is one in the long run, regardless of the strength of production smoothing, stockout avoidance, or cost shocks, but that, at business cycle horizons, the conditional variance ratio (conditional on past production and sales) is greater than one. We explain – analytically, using our model, and intuitively – four traditional inventory puzzles and three puzzles about inventories and monetary policy.

Suggested Citation

  • Maccini, Louis J. & Moore, Bartholomew & Schaller, Huntley, 2015. "Inventory behavior with permanent sales shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 290-313.
    • Handle: RePEc:eee:dyncon:v:53:y:2015:i:c:p:290-313
    DOI: 10.1016/j.jedc.2015.02.010
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165188915000299
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jedc.2015.02.010?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Miron, Jeffrey A & Zeldes, Stephen P, 1988. "Seasonality, Cost Shocks, and the Production Smoothing Models of Inventories," Econometrica, Econometric Society, vol. 56(4), pages 877-908, July.
    2. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
    3. Blinder, Alan S, 1986. "More on the Speed of Adjustment in Inventory Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(3), pages 355-365, August.
    4. Ogaki, Masao & Park, Joon Y., 1997. "A cointegration approach to estimating preference parameters," Journal of Econometrics, Elsevier, vol. 82(1), pages 107-134.
    5. Alan S. Blinder, 1986. "Can the Production Smoothing Model of Inventory Behavior be Saved?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 431-453.
    6. James A. Kahn & Mark Bils, 2000. "What Inventory Behavior Tells Us about Business Cycles," American Economic Review, American Economic Association, vol. 90(3), pages 458-481, June.
    7. Durlauf, Steven N. & Maccini, Louis J., 1995. "Measuring noise in inventory models," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 65-89, August.
    8. Garcia, Rene & Perron, Pierre, 1996. "An Analysis of the Real Interest Rate under Regime Shifts," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 111-125, February.
    9. 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.
    10. 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.
    11. Humphreys, Brad R. & Maccini, Louis J. & Schuh, Scott, 2001. "Input and output inventories," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 347-375, April.
    12. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    13. Aubhik Khan & Julia K. Thomas, 2007. "Inventories and the Business Cycle: An Equilibrium Analysis of ( S , s ) Policies," American Economic Review, American Economic Association, vol. 97(4), pages 1165-1188, September.
    14. Granger, C W J & Lee, T H, 1989. "Investigation of Production, Sales and Inventory Relationships Using Multicointegration and Non-symmetric Error Correction Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages 145-159, Supplemen.
    15. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    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. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(3), pages 869-902.
    18. Luca Benati & Thomas A. Lubik, 2014. "Sales, Inventories And Real Interest Rates: A Century Of Stylized Facts," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(7), pages 1210-1222, November.
    19. Blanchard, Olivier J, 1983. "The Production and Inventory Behavior of the American Automobile Industry," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 365-400, June.
    20. 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, President and Fellows of Harvard College, vol. 107(2), pages 481-510.
    21. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
    22. Louis J. Maccini & Bartholomew J. Moore & Huntley Schaller, 2004. "The Interest Rate, Learning, and Inventory Investment," American Economic Review, American Economic Association, vol. 94(5), pages 1303-1327, December.
    23. Chang, Yongsung & Hornstein, Andreas & Sarte, Pierre-Daniel, 2009. "On the employment effects of productivity shocks: The role of inventories, demand elasticity, and sticky prices," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 328-343, April.
    24. Yi Wen, 2011. "Input and Output Inventory Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 181-212, October.
    25. J. B. Taylor & M. Woodford (ed.), 1999. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 1, number 1.
    26. Kenneth D. West, 1990. "The Sources of Fluctuations in Aggregate Inventories and GNP," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(4), pages 939-971.
    27. Guiseppe Bertola & Ricardo J. Caballero, 1994. "Irreversibility and Aggregate Investment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(2), pages 223-246.
    28. Michael C. Lovell, 1959. "Manufacturers' Inventories, Sales Expectations, and the Acceleration Principle," Cowles Foundation Discussion Papers 86, Cowles Foundation for Research in Economics, Yale University.
    29. Ramey, Valerie A, 1989. "Inventories as Factors of Production and Economic Fluctuations," American Economic Review, American Economic Association, vol. 79(3), pages 338-354, June.
    30. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    31. Matteo Iacoviello & Fabio Schiantarelli & Scott Schuh, 2011. "Input And Output Inventories In General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(4), pages 1179-1213, November.
    32. Wen, Yi, 2005. "Understanding the inventory cycle," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1533-1555, November.
    33. Eichenbaum, Martin, 1989. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," American Economic Review, American Economic Association, vol. 79(4), pages 853-864, September.
    34. Yongseung Jung & Tack Yun, 2005. "Monetary policy shocks, inventory dynamics, and price-setting behavior," Working Paper Series 2006-02, Federal Reserve Bank of San Francisco.
    35. Rossana, Robert J, 1998. "Structural Instability and the Production-Smoothing Model of Inventories," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 206-215, April.
    36. Maccini, Louis J & Rossana, Robert J, 1984. "Joint Production, Quasi-Fixed Factors of Production, and Investement in Finished Goods Inventories," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(2), pages 218-236, May.
    37. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862, Elsevier.
    38. Pengfei Wang & Yi Wen, 2009. "Inventory accelerator in general equilibrium," Working Papers 2009-010, Federal Reserve Bank of St. Louis.
    39. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-679, September.
    40. 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.
    41. 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.
    42. Schaller, Huntley, 2006. "Estimating the long-run user cost elasticity," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 725-736, May.
    43. Rossana, R J, 1993. "The Long-Run Implications of the Production Smoothing Model of Inventories: An Empirical Test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 295-306, July-Sept.
    44. 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.
    45. Jones, Christopher S. & Tuzel, Selale, 2013. "Inventory investment and the cost of capital," Journal of Financial Economics, Elsevier, vol. 107(3), pages 557-579.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yang, Junhong & Guariglia, Alessandra & Peng, Yuchao & Shi, Yukun, 2022. "Inventory investment and the choice of financing: Does financial development play a role?," Journal of Corporate Finance, Elsevier, vol. 74(C).
    2. Sarte, Pierre-Daniel & Schwartzman, Felipe & Lubik, Thomas A., 2015. "What inventory behavior tells us about how business cycles have changed," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 264-283.
    3. Yulei Luo & Jun Nie & Xiaowen Wang & Eric Young, 2021. "Production and Inventory Dynamics under Ambiguity Aversion," Research Working Paper RWP 21-05, Federal Reserve Bank of Kansas City.
    4. James Morley & Aarti Singh, 2016. "Inventory Shocks and the Great Moderation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(4), pages 699-728, June.
    5. Adam Copeland & George Hall & Louis J. Maccini, 2019. "Interest Rates and the Market for New Light Vehicles," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(5), pages 1137-1168, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Louis Maccini, 2013. "Inventory Behavior with Permanent Sales Shocks," Economics Working Paper Archive 608, The Johns Hopkins University,Department of Economics.
    2. Louis J. Maccini & Bartholomew J. Moore & Huntley Schaller, 2004. "The Interest Rate, Learning, and Inventory Investment," American Economic Review, American Economic Association, vol. 94(5), pages 1303-1327, December.
    3. 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.
    4. Yi Wen, 2011. "Input and Output Inventory Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 181-212, October.
    5. Zhiwei Xu & Yi Wen & pengfei Wang, 2012. "When Do Inventories Destabilize the Economy? ---A Tractable Approach to (S,s) Policies," 2012 Meeting Papers 288, Society for Economic Dynamics.
    6. Humphreys, Brad R. & Maccini, Louis J. & Schuh, Scott, 2001. "Input and output inventories," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 347-375, April.
    7. Kenneth D. West, 1993. "Inventory Models," NBER Technical Working Papers 0143, National Bureau of Economic Research, Inc.
    8. Liu, Wen-Hsien & Chung, Ching-Fan & Chang, Kuang-Liang, 2013. "Inventory change, capacity utilization and the semiconductor industry cycle," Economic Modelling, Elsevier, vol. 31(C), pages 119-127.
    9. Daniele Coen-Pirani, 2004. "Markups, Aggregation, and Inventory Adjustment," American Economic Review, American Economic Association, vol. 94(5), pages 1328-1353, December.
    10. Yulei Luo & Jun Nie & Xiaowen Wang & Eric Young, 2021. "Production and Inventory Dynamics under Ambiguity Aversion," Research Working Paper RWP 21-05, Federal Reserve Bank of Kansas City.
    11. Yi Wen, 2008. "Inventories, liquidity, and the macroeconomy," Working Papers 2008-045, Federal Reserve Bank of St. Louis.
    12. Galeotti, Marzio & Maccini, Louis J. & Schiantarelli, Fabio, 2005. "Inventories, employment and hours," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 575-600, April.
    13. Scott Schuh, "undated". "Evidence on the Link between Firm-Level and Aggregate Inventory Behavior," Finance and Economics Discussion Series 1996-46, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    14. Wen, Yi, 2005. "Understanding the inventory cycle," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1533-1555, November.
    15. Matteo Iacoviello & Fabio Schiantarelli & Scott Schuh, 2011. "Input And Output Inventories In General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(4), pages 1179-1213, November.
    16. Hall, George & Rust, John, 2000. "An empirical model of inventory investment by durable commodity intermediaries," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 52(1), pages 171-214, June.
    17. Mr. Yungsan Kim & Woon Gyu Choi, 2001. "Has Inventory Investment Been Liquidity-Constrained? Evidence From U.S. Panel Data," IMF Working Papers 2001/122, International Monetary Fund.
    18. James A. Kahn & Mark Bils, 2000. "What Inventory Behavior Tells Us about Business Cycles," American Economic Review, American Economic Association, vol. 90(3), pages 458-481, June.
    19. Durlauf, Steven N. & Maccini, Louis J., 1995. "Measuring noise in inventory models," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 65-89, August.
    20. Gérard P. Cachon & Taylor Randall & Glen M. Schmidt, 2007. "In Search of the Bullwhip Effect," Manufacturing & Service Operations Management, INFORMS, vol. 9(4), pages 457-479, April.

    More about this item

    Keywords

    Inventories; Production smoothing; Stockout avoidance; Cointegration; Monetary policy effects;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:53:y:2015:i:c:p:290-313. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jedc .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.