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The magnitude of the speculative motive for holding inventories in a real business cycle model

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  • Lawrence J. Christiano
  • Terry J. Fitzgerald

Abstract

The motive to hold inventories purely in the hope of profiting from a price increase is called the speculative motive. This motive has received considerable attention in the literature. However, existing studies do not have a clear implication for how large it is quantitatively. This paper incorporates the speculative motive for holding inventories into an otherwise standard real business cycle model and finds that empirically plausible parameterizations of the model result in an average inventory stock to output ratio that is virtually zero. For this reason, we conclude that the quantitative magnitude of the speculative role for holding inventories in this model is quite small. This suggests the possibility that the study of aggregate economic phenomena can safely abstract from inventory speculation.

Suggested Citation

  • Lawrence J. Christiano & Terry J. Fitzgerald, 1989. "The magnitude of the speculative motive for holding inventories in a real business cycle model," Discussion Paper / Institute for Empirical Macroeconomics 10, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmem:10
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    References listed on IDEAS

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    1. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    3. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-679, September.
    4. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    5. Patricia B. Reagan, 1982. "Inventory and Price Behaviour," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 137-142.
    6. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
    7. Andrew B. Abel, 1985. "Inventories, Stock-Outs and Production Smoothing," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 283-293.
    8. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
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    Citations

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    Cited by:

    1. 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.
    2. Christiano, Lawrence J. & Fisher, Jonas D. M., 2000. "Algorithms for solving dynamic models with occasionally binding constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 24(8), pages 1179-1232, July.
    3. Matteo Iacoviello & Fabio Schiantarelli & Scott Schuh, 2011. "Input And Output Inventories In General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(4), pages 1179-1213, November.
    4. Chang, Yongsung & Hornstein, Andreas & Sarte, Pierre-Daniel, 2009. "On the employment effects of productivity shocks: The role of inventories, demand elasticity, and sticky prices," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 328-343, April.
    5. Lawrence J. Christiano, 1989. "Understanding Japan's saving rate: the reconstruction hypothesis," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 13(Spr), pages 10-25.

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    Keywords

    Business cycles; Inventories;

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