The Sources of Fluctuations in Aggregate Inventories and GNP

A simple real linear-quadratic inventory model is used to determine how cost and demand shocks interacted to cause fluctuations in aggregate inventories and GNP in the United States, 1947–1986. Cost shocks appear to be the predominant source of fluctuations in inventories and are largely, though not exclusively, responsible for the fact that GNP is more variable than final sales. Cost and demand shocks are of roughly equal importance for GNP. These estimates, however, are imprecise. With different, but plausible, values for a certain target inventory-sales ratio, cost shocks are less important than demand shocks for GNP fluctuations.