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Durable goods inventories and the Great Moderation

  • James A. Kahn
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    This paper revisits the hypothesis that changes in inventory management were an important contributor to volatility reductions during the Great Moderation. It documents how changes in inventory behavior contributed to the stabilization of the U.S. economy within the durable goods sector, in particular, and develops a model of inventory behavior that is consistent with the key facts about volatility decline in that sector. The model is calibrated to evidence from survey data showing that lead times for materials orders in manufacturing shrank after the early 1980s. Simulations of the model show large reductions in the volatility of output growth and more modest reductions in the volatility of sales growth. In addition, the model addresses concerns raised by a number of researchers who criticize the inventory literature's focus on finished goods inventories, given that stocks of works-in-process and materials are actually larger and more volatile that those of finished goods. The model adapts the stockout-avoidance concept to a production-to-order setting and shows that much of the intuition and results regarding production volatility still apply.

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    Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 325.

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    Date of creation: 2008
    Date of revision:
    Handle: RePEc:fip:fednsr:325
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    1. Yi Wen, 2009. "Input and output inventory dynamics," Working Papers 2008-008, Federal Reserve Bank of St. Louis.
    2. Mark Bils & James Kahn, 1998. "What inventory behavior tells us about business cycles," Research Paper 9817, Federal Reserve Bank of New York.
    3. Humphreys, Brad R. & Maccini, Louis J. & Schuh, Scott, 2001. "Input and output inventories," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 347-375, April.
    4. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
    5. James A. Kahn, 2000. "Explaining the gap between new home sales and inventories," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 6(May).
    6. Giorgio Primiceri & Alejandro Justiniano, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," 2006 Meeting Papers 353, Society for Economic Dynamics.
    7. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202.
    8. 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.
    9. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2008. "Explaining The Great Moderation: It Is Not The Shocks," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 621-633, 04-05.
    10. Jonathan McCarthy & Egon Zakrajsek, 2002. "Inventory dynamics and business cycles: what has changed?," Staff Reports 156, Federal Reserve Bank of New York.
    11. Valerie A. Ramey & Daniel J. Vine, 2005. "Tracking the source of the decline in GDP volatility: an analysis of the automobile industry," Finance and Economics Discussion Series 2005-14, Board of Governors of the Federal Reserve System (U.S.).
    12. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
    13. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
    14. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: changes in the volatility of economic activity at the macro and micro Levels," Staff Reports 334, Federal Reserve Bank of New York.
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