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Retail inventories, internal finance, and aggregate fluctuations

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  • Egon Zakrajsek

Abstract

We investigate the implications of capital market imperfections for inventory investment in retail trade, using a new source firm-level data--the micro data underlying the published Quarterly Financial Reports. An error-correction model that includes internal funds and forward-looking expectations for the stochastic process of sales is not rejected by the data. Both the cross-sectional and time-series results are consistent with the existence of significant capital market frictions in the retail trade sector: (1) for firms with limited access to capital markets, internal funds are a significant predictor of inventory investment; (2) the predictive power of internal funds is highly asymmetric over a business cycle, rising considerably in recessions. The quantitative significance of financial factors suggests that a large portion of the observed volatility in aggregate retail inventory investment over a business cycle is due to fluctuations in internal funds

Suggested Citation

  • Egon Zakrajsek, 1997. "Retail inventories, internal finance, and aggregate fluctuations," Research Paper 9722, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednrp:9722
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    References listed on IDEAS

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    Cited by:

    1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    2. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1995. "Three Financing Constraint Hypotheses and Inventory Investment: New Tests With Time and Sectoral Heterogeneity," Macroeconomics 9510001, EconWPA, revised 09 Oct 1995.
    3. Alejandro Diaz-Bautista & Julio R. Escandon, 2003. "A Simple Dynamic Model of Credit and Aggregate Demand," Macroeconomics 0308001, EconWPA.
    4. Rose Cunningham, 2004. "Finance Constraints and Inventory Investment: Empirical Tests with Panel Data," Macroeconomics 0411015, EconWPA.
    5. Jonathan McCarthy & Egon Zakrajsek, 1998. "Microeconomic inventory adjustment and aggregate dynamics," Staff Reports 54, Federal Reserve Bank of New York.
    6. Rose Cunningham, 2004. "Finance Constraints and Inventory Investment: Empirical Tests with Panel Data," Staff Working Papers 04-38, Bank of Canada.

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