IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

The Role of Inventories and Capacity Utilization as Shock Absorbers

  • Leonardo Auernheimer
  • Danilo Trupkin

    (Universidad de Montevideo)

We examine the role of inventories and capacity utilization (of both capital and labor) for the propagation of business cycle fluctuations. We document a new set of facts regarding the U.S. cyclical regularities of inventories and capacity utilization. First, we find that capital utilization and the flows of services from both capital and labor are procyclical, and comove with the holdings of inventories. Second, we find that labor utilization is procyclical as well, but is weakly negatively correlated with inventories. We build a model that accounts for these facts, and also accounts for the stylized inventory facts, i.e., inventory holdings are procyclical, while the inventory-to-sales ratio is countercyclical. The analysis is centered on the effects of two possible shocks: preference (demand) shocks and technology shocks. Our model shows that inventories and the rate of capital utilization are mostly complements, while inventories and the rate of labor utilization are mostly substitutes. It further shows that temporary demand shocks emphasize the role of inventories as being a "shock absorber," whereas high-persistence demand shocks, as well as technology shocks of any persistence, emphasize the role of inventories as being a complement to consumption. (Copyright: Elsevier)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://dx.doi.org/10.1016/j.red.2013.04.003
Download Restriction: Access to full texts is restricted to ScienceDirect subscribers and institutional members. See http://www.sciencedirect.com/ for details.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 17 (2014)
Issue (Month): 1 (January)
Pages: 70-85

as
in new window

Handle: RePEc:red:issued:12-159
Contact details of provider: Postal:
Marina Azzimonti, Department of Economics, Stonybrook University, 10 Nicolls Road, Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/red/
Email:


More information through EDIRC

Order Information: Web: https://www.economicdynamics.org/subscription-information/ Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  2. 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.
  3. Aubhik Khan & Julia K. Thomas, 2002. "Inventories and the business cycle: an equilibrium analysis of (S,s) policies," Working Papers 02-20, Federal Reserve Bank of Philadelphia.
  4. Gabriel Perez-Quiros & Margaret M. McConnell, 2000. "Output Fluctuations in the United States: What Has Changed since the Early 1980's?," American Economic Review, American Economic Association, vol. 90(5), pages 1464-1476, December.
  5. Altig, David E & Christiano, Lawrence J. & Eichenbaum, Martin & Lindé, Jesper, 2005. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," CEPR Discussion Papers 4858, C.E.P.R. Discussion Papers.
  6. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  7. Matteo Iacoviello & Fabio Schiantarelli & Scott Schuh, 2010. "Input and output inventories in general equilibrium," International Finance Discussion Papers 1004, Board of Governors of the Federal Reserve System (U.S.).
  8. Fisher, J.D.M. & Hornstein, A., 1995. "(S,s)Inventory Policies in General Equilibrium," UWO Department of Economics Working Papers 9514, University of Western Ontario, Department of Economics.
  9. Alejandro Justiniano & Northwestern University, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," Computing in Economics and Finance 2006 219, Society for Computational Economics.
  10. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research 109, National Bank of Belgium.
  11. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  12. Hall, Robert E, 1997. "Macroeconomic Fluctuations and the Allocation of Time," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages S223-50, January.
  13. Burnside, Craig & Eichenbaum, Martin, 1996. "Factor-Hoarding and the Propagation of Business-Cycle Shocks," American Economic Review, American Economic Association, vol. 86(5), pages 1154-74, December.
  14. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1990. "Labor Hoarding and the Business Cycle," NBER Working Papers 3556, National Bureau of Economic Research, Inc.
  15. Calvo, Guillermo A, 1975. "Efficient and Optimal Utilization of Capital Services," American Economic Review, American Economic Association, vol. 65(1), pages 181-86, March.
  16. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  17. Wen, Yi, 2005. "Understanding the inventory cycle," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1533-1555, November.
  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. Galeotti, Marzio & Maccini, Louis J. & Schiantarelli, Fabio, 2005. "Inventories, employment and hours," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 575-600, April.
  20. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  21. Andrew T. Levin & Alexei Onatski & John Williams & Noah M. Williams, 2006. "Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 229-312 National Bureau of Economic Research, Inc.
  22. Beatriz Rumbos & Leonardo Auernheimer, 2001. "Endogenous capital utilization in a neoclassical growth model," Atlantic Economic Journal, International Atlantic Economic Society, vol. 29(2), pages 121-134, June.
  23. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
  24. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202.
  25. Hashmat Khan & Charlotta Groth, 2007. "Investment Adjustment Costs: An Empirical Assessment," Carleton Economic Papers 07-08, Carleton University, Department of Economics, revised Dec 2010.
  26. Khan, Aubhik & Thomas, Julia K., 2007. "EXPLAINING INVENTORIES: A BUSINESS CYCLE ASSESSMENT OF THE STOCKOUT AVOIDANCE AND (S,s) MOTIVES," Macroeconomic Dynamics, Cambridge University Press, vol. 11(05), pages 638-664, November.
  27. 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.
  28. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  29. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2005. "Online Appendix to "Firm-Specific Capital, Nominal Rigidities and the Business Cycle"," Technical Appendices 09-191, Review of Economic Dynamics.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:issued:12-159. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.