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Inventories and the Role of Goods-Market Frictions for Business Cycles

Author

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  • Wouter Den Haan

    () (Centre for Macroeconomics (CFM))

Abstract

Changes in the stock of inventories are important for fluctuations in aggregate output. However, the possibility that firms do not sell all produced goods and inventory accumulation are typically ignored in business cycle models. This paper captures this with a goods-market friction. Using US data, "goods-market efficiency" is shown to be strongly procyclical. By including both a goods-market friction and a standard labor-market search friction, the model developed can substantially magnify and propagate shocks. Despite its simplicity, the model can also replicate key inventory facts. However, when these inventory facts are used to discipline parameter values, then goods-market frictions are quantitatively not very important.

Suggested Citation

  • Wouter Den Haan, 2014. "Inventories and the Role of Goods-Market Frictions for Business Cycles," Discussion Papers 1402, Centre for Macroeconomics (CFM).
  • Handle: RePEc:cfm:wpaper:1402
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    File URL: http://www.centreformacroeconomics.ac.uk/Discussion-Papers/2014/CFMDP2014-02-Paper.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Matching Models; Search Frictions; Magnification; Propagation;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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