Modelling the behaviour of U.S. Inventories: A Cointegration-Euler Approach
Cyclical contractions are often referred to as inventory cycles, in part because movements in inventories can amplify cyclical fluctuations in output. An unanticipated slowing in demand generally leads to an unintended buildup of inventories: only with a lag do firms adjust production and their actual holding of inventories relative to the desired level. A possible explanation for this accumulation is that the costs of adjusting inventory holdings outweigh the disequilibrium costs, i.e., the cost of temporarily deviating from the equilibrium level of inventories. In this paper, the relative importance of the disequilibrium costs to adjustment costs of inventories is evaluated. An estimate of the rate of inventory adjustment towards its long-run equilibrium level is provided in the United States by means of a linear-quadratic model with integrated processes. A limited-information approach allows the time-series properties of the data to be exploited and consistent estimates of the structural parameters of the Euler equation obtained. Evidence is provided that the actual level of U.S. inventories was generally above the target level during the past six recession periods and that inventories fell below their desired level following an economic downturn. Furthermore, the actual level of inventories appears to have been at desired levels between the 1960 and the 1969-70 recessions and since the last recession in 19901991--two periods of sustained economic growth. These findings support the view that inventory imbalances can amplify the business cycle. The empirical estimates also imply that adjustment costs are substantially more important than disequilibrium costs. The estimate of the speed of adjustment suggests that firms adjust their holdings of inventories slowly as it takes about a year for 95 per cent of the adjustment of the actual level to the target level to be completed.
|Date of creation:||1997|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
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.:
- Olivier J. Blanchard, 1982.
"The Production and Inventory Behavior of the American Automobile Industry,"
NBER Working Papers
0891, National Bureau of Economic Research, Inc.
- 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.
- Eichenbaum, Martin S., 1984. "Rational expectations and the smoothing properties of inventories of finished goods," Journal of Monetary Economics, Elsevier, vol. 14(1), pages 71-96, July.
- Andrews, Donald W K, 1993.
"Tests for Parameter Instability and Structural Change with Unknown Change Point,"
Econometric Society, vol. 61(4), pages 821-56, July.
- Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
- Robert A. Amano, 1995.
"Empirical Evidence on the Cost of Adjustment and Dynamic Labour Demand,"
- Robert A. Amano, . "Empirical Evidence on the Cost of Adjustment and Dynamic Labour Demand," Working Papers 95-3, Bank of Canada.
- Alan S. Blinder, 1986.
"More on the Speed of Adjustment in Inventory Models,"
NBER Working Papers
1913, National Bureau of Economic Research, Inc.
- 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 355-65, August.
- Christiano, Lawrence J. & Eichenbaum, Martin, 1987.
"Temporal aggregation and structural inference in macroeconomics,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 26(1), pages 63-130, January.
- Lawrence J. Christiano & Martin S. Eichenbaum, 1986. "Temporal Aggregation and Structural Inference in Macroeconomics," NBER Technical Working Papers 0060, National Bureau of Economic Research, Inc.
- Lawrence J. Christiano & Martin Eichenbaum, 1987. "Temporal aggregation and structural inference in macroeconomics," Working Papers 306, Federal Reserve Bank of Minneapolis.
- Donald S. Allen, 1995. "Changes in inventory management and the business cycle," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 17-26.
When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:97-19. 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: ()
If references are entirely missing, you can add them using this form.