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Inventory Investment and the Business Cycle : The usual Suspect

Author

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  • Frédérique Bec

    (CREST, THEMA)

  • Mélika Ben Salem

    (CEE, PSE, Université Paris Est)

Abstract

From quarterly postwar US and French data, this paper provides evidence of a bounce-back effect in inventory investment but not in final sales data. Actually, from a bounce-back augmented threshold model, it appears that i) the null hypothesis of no bounce-back effect is strongly rejected by the inventory investment data and ii) the one-step ahead forecasting performances of the models accounting for this bounce-back effect are well improved compared to linear or standard threshold autoregressions. This supports the conventional wisdom that inventory investment exacerbates aggregate fluctuations, in line with the recent theoretical models by, e.g., Wang and Wen (Wang, P., and Y. Wen. 2009. "Inventory Accelerator in General Equilibrium." Working Paper 010, Federal Reserve Bank of St. Louis) and Wang, Wen and Xu (Wang, P., Y. Wen, and Z. Xu. 2011. "When do Inventories Destabilize the Economy? An Analytical Approach to (s,s) Policies." Working Paper 014, Federal Reserve Bank of St. Louis) which clearly predict a destabilizing role of inventory investment over the business cycle. By contrast, our empirical findings cast doubt on models based on the stockouts avoidance motive for holding inventories.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Frédérique Bec & Mélika Ben Salem, 2012. "Inventory Investment and the Business Cycle : The usual Suspect," Working Papers 2012-09, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2012-09
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    References listed on IDEAS

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    1. Oleksiy Kryvtsov & Virgiliu Midrigan, 2013. "Inventories, Markups, and Real Rigidities in Menu Cost Models," Review of Economic Studies, Oxford University Press, vol. 80(1), pages 249-276.
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    5. Oleksiy Kryvtsov & Virgiliu Midrigan, 2010. "Inventories and Real Rigidities in New Keynesian Business Cycle Models," NBER Chapters, in: Sticky Prices and Inflation Dynamics (NBER-TCER-CEPR), pages 259-281, National Bureau of Economic Research, Inc.
    6. Inoue, Atsushi & Kilian, Lutz, 2006. "On the selection of forecasting models," Journal of Econometrics, Elsevier, vol. 130(2), pages 273-306, February.
    7. Yi Wen, 2011. "Input and Output Inventory Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 181-212, October.
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    14. Costantini, Mauro & Kunst, Robert M., 2011. "On the Usefulness of the Diebold-Mariano Test in the Selection of Prediction Models," Economics Series 276, Institute for Advanced Studies.
    15. 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 853-864, September.
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    Citations

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    Cited by:

    1. Frederique Bec & Marie Bessec, 2013. "Inventory Investment Dynamics and Recoveries: A Comparison of Manufacturing and Retail Trade Sectors," Economics Bulletin, AccessEcon, vol. 33(3), pages 2209-2222.
    2. Frédérique Bec & Antonin Aviat & Claude Diebolt & Catherine Doz & Denis Ferrand & Laurent Ferrara & Eric Heyer & Valérie Mignon & Pierre-Alain Pionnier, 2021. "Dating business cycles in France:A reference chronology," Working Papers hal-03678309, HAL.
    3. repec:dau:papers:123456789/11777 is not listed on IDEAS

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    More about this item

    Keywords

    inventory investment; threshold models; bounce-back effects; asymmetric business cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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