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Input and output inventories in general equilibrium

  • Matteo Iacoviello
  • Fabio Schiantarelli
  • Scott Schuh

We build and estimate a two-sector (goods and services) dynamic stochastic general equilibrium model with two types of inventories: materials (input) inventories facilitate the production of finished goods, while finished goods (output) inventories yield utility services. The model is estimated using Bayesian methods. The estimated model replicates the volatility and cyclicality of inventory investment and inventory-to-target ratios. Although inventories are an important element of the model's propagation mechanism, shocks to inventory efficiency or management are not an important source of business cycles. When the model is estimated over two subperiods (pre and post 1984), changes in the volatility of inventory shocks or in structural parameters associated with inventories, such as the input inventory to output ratio, play a small role in reducing the volatility of output.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1004.

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Date of creation: 2010
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Handle: RePEc:fip:fedgif:1004
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