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

  • Wouter Den Haan

    ()

    (Centre for Macroeconomics (CFM))

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.

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File URL: http://www.centreformacroeconomics.ac.uk/Discussion-Papers/2014/CFMDP2014-02-Paper.pdf
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Paper provided by Centre for Macroeconomics (CFM) in its series Discussion Papers with number 1402.

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Length: 53 pages
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:cfm:wpaper:1402
Contact details of provider: Web page: http://www.centreformacroeconomics.ac.uk/

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  1. Marcus Hagedorn & Iourii Manovskii, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," 2005 Meeting Papers 460, Society for Economic Dynamics.
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  12. 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.
  13. Gavazza, Alessandro, 2010. "The role of trading frictions in real asset markets," MPRA Paper 25781, University Library of Munich, Germany.
  14. Eichenbaum, Martin, 1989. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," American Economic Review, American Economic Association, vol. 79(4), pages 853-64, September.
  15. Garey Ramey & Wouter J. den Haan & Joel Watson, 2000. "Job Destruction and Propagation of Shocks," American Economic Review, American Economic Association, vol. 90(3), pages 482-498, June.
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  19. repec:pri:cepsud:234kaplan is not listed on IDEAS
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