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Input and Output Inventories in General Equilibrium

  • Matteo Iacoviello

    ()

    (Boston College)

  • Fabio Schiantarelli

    ()

    (Boston College)

  • Scott Schuh

    ()

    (Federal Reserve Bank of Boston)

We build and estimate a two-sector (goods and services) dynamic general equilibrium model with two types of inventories: finished goods (output) inventories yield utility services while materials (input) inventories facilitate the production of goods. The model, which contains neutral and inventory-specific technology shocks and preference shocks, is estimated by Bayesian methods. The estimated model replicates the volatility and cyclicality of inventory investment and inventory-target ratios. When estimated over subperiods, the results suggest that changes in the volatility of inventory shocks, or in structural parameters associated with inventories, play a minor role in the reduction of the volatility of output.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 658.

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Date of creation: 23 Mar 2007
Date of revision: 23 Oct 2009
Handle: RePEc:boc:bocoec:658
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