Why does inventory investment fluctuate so much during contractions?
Inventory investment appears to have a significant impact on the movement of aggregate output during business cycle contractions. Recent empirical evidence has raised doubts about the often used assumption of a buffer-stock/production-smoothing motivation for inventory. Work by Blinder and Maccini suggests that the use of an (S,s), or intermittent adjustment decision rule, better explains the stylized facts of the dynamics of inventory investment. This has led to the focus on the (S,s) as an alternative to production-smoothing. I assume that some agents use the (S,s) adjustment rule while others attempt to smooth production in the face of convex costs and uncertain demand. I simulate the interaction of heterogeneous agents (representing manufacturing, wholesale and retail agents) with different inventory decision rules to demonstrate that the stylized facts can be explained by a disaggregated model with vertical coupling between agents. The simulations find opposite aggregation bias effects for (S,s) agents than for production smoothing agents. In particular, aggregation horizontally across agents and/or temporally decreased the relative variability of production/ordering to sales for (S,s) agents while it increased the relative variability for production smoothing agents. The simulations also revealed synchronization by (S,s) agents when subjected to aggregate shocks. This may explain in some of the asymmetrical characteristics of the business cycle.
|Date of creation:||1994|
|Publication status:||Published in Journal of Economic Behavior and Organization, January 1997|
|Contact details of provider:|| Postal: P.O. Box 442, St. Louis, MO 63166|
Web page: http://www.stlouisfed.org/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lawrence J. Christiano & Martin S. Eichenbaum, 1986.
"Temporal Aggregation and Structural Inference in Macroeconomics,"
NBER Technical Working Papers
0060, National Bureau of Economic Research, Inc.
- Christiano, Lawrence J. & Eichenbaum, Martin, 1987. "Temporal aggregation and structural inference in macroeconomics," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 26(1), pages 63-130, January.
- Lawrence J. Christiano & Martin Eichenbaum, 1987. "Temporal aggregation and structural inference in macroeconomics," Working Papers 306, Federal Reserve Bank of Minneapolis.
- Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 306-334, April.
- Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
- Ramey, Valerie A. & West, Kenneth D., 1999.
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 13, pages 863-923
- Russell Cooper & John C. Haltiwanger, 1987.
"Inventories and the Propagation of Sectoral Shocks,"
NBER Working Papers
2425, National Bureau of Economic Research, Inc.
- Cooper, Russell & Haltiwanger, John, 1990. "Inventories and the Propagation of Sectoral Shocks," American Economic Review, American Economic Association, vol. 80(1), pages 170-190, March.
- Caplin, Andrew S, 1985. "The Variability of Aggregate Demand with (S, s) Inventory Policies," Econometrica, Econometric Society, vol. 53(6), pages 1395-1409, November.
- Donald P. Morgan, 1991. "Will just-in-time inventory techniques dampen recessions?," Economic Review, Federal Reserve Bank of Kansas City, issue Mar, pages 21-33.
- Patricia C. Mosser, 1991. "Trade Inventories and (S,s)," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1267-1286.
- Nakamura, Masao & Nakamura, Alice, 1989. "Inventory management behavior of American and Japanese firms," Journal of the Japanese and International Economies, Elsevier, vol. 3(3), pages 270-291, September.
- Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle," Macroeconomics 9401001, EconWPA.
- Lai, Kon S, 1991. "Aggregation and Testing of the Production Smoothing Hypothesis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(2), pages 391-403, May.
- Lovell, Michael C., 1993. "Simulating the inventory cycle," Journal of Economic Behavior & Organization, Elsevier, vol. 21(2), pages 147-179, June.
- Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-679, September.
When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:1994-029. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.