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What inventories tell us about aggregate fluctuations -- a tractable approach to (S,s) policies

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  • Pengfei Wang
  • Yi Wen
  • Zhiwei Xu

Abstract

We estimate a DSGE model with (S,s) inventory policies. We find that (i) taking inventories into account can significantly improve the empirical fit of DSGE models in matching the standard business-cycle moments (in addition to explaining inventory fluctuations); (ii) (S,s) inventory policies can significantly amplify aggregate output fluctuations, in contrast to the findings of the recent general-equilibrium inventory literature; and (iii) aggregate demand shocks become more important than technol- ogy shocks in explaining the business cycle once inventories are incorporated into the model. An independent contribution of our paper is that we develop a solution method for analytically solving (S,s) inventory policies in general-equilibrium models with het- erogeneous firms and a large aggregate state space, and we illustrate how standard log-linearization methods can be used to solve various versions of our inventory model, generate impulse response functions, and estimate the model’s deep structural para- meters.

Suggested Citation

  • Pengfei Wang & Yi Wen & Zhiwei Xu, 2012. "What inventories tell us about aggregate fluctuations -- a tractable approach to (S,s) policies," Working Papers 2012-059, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2012-059
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    References listed on IDEAS

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    1. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 655-690.
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    3. Jonas D. M. Fisher & Andreas Hornstein, 2000. "(S, s) Inventory Policies in General Equilibrium," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 117-145.
    4. Julia K. Thomas, 2002. "Is Lumpy Investment Relevant for the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 508-534, June.
    5. Robert G. King & Julia K. Thomas, 2006. "Partial Adjustment Without Apology," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 779-809, August.
    6. 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.
    7. Aubhik Khan & Julia K. Thomas, 2007. "Inventories and the Business Cycle: An Equilibrium Analysis of ( S , s ) Policies," American Economic Review, American Economic Association, vol. 97(4), pages 1165-1188, September.
    8. 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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    10. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
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    13. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
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    Cited by:

    1. Matheus Grasselli & Adrien Nguyen-Huu, 2016. "Inventory growth cycles with debt-financed investment," Papers 1610.00955, arXiv.org.
    2. Antoniou, Fabio & Fiocco, Raffaele, 2017. "Strategic inventories under limited commitment," Working Papers 2072/306512, Universitat Rovira i Virgili, Department of Economics.
    3. Antoniou, Fabio & Fiocco, Raffaele, 2017. "Strategic inventories under limited commitment," Working Papers 2072/306512, Universitat Rovira i Virgili, Department of Economics.

    More about this item

    Keywords

    Inventories;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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