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What Inventory Behavior Tells Us About How Business Cycles Have Changed

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  • Thomas A. Lubik

    (Federal Reserve Bank of Richmond
    Yale University
    Johns Hopkins University
    Economic Research Division)

  • Felipe Schwartzman
  • Pierre-Daniel G. Sarte

Abstract

Beginning in the mid-1980s, the nature of U.S. business cycles changed in important ways, as made evident by distinctive shifts in the comovement and relative volatilities of key economic aggregates. These include labor productivity, hours, output, and inventories. Unlike the widely documented change in absolute volatility over that period, known as the Great Moderation, these shifts in comovement and relative volatilities persist into the Great Recession. To understand these changes, we exploit the fact that inventory data are informative about sources of business cycles. Specifically, they provide additional information relative to aggregate investment regarding firms' intertemporal decisions. In this paper, we show that the \\"investment wedge\\" estimated with inventories, unlike previous measures, correlates well with established independent measures of credit market frictions. Furthermore, contrary to previous findings, our generalized investment wedge informed by inventory behavior plays a key role in explaining the shifts in U.S. business cycles observed after the mid-1980s.

Suggested Citation

  • Thomas A. Lubik & Felipe Schwartzman & Pierre-Daniel G. Sarte, 2014. "What Inventory Behavior Tells Us About How Business Cycles Have Changed," Working Paper 14-6, Federal Reserve Bank of Richmond, revised 01 Mar 2014.
  • Handle: RePEc:fip:fedrwp:14-06
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    Cited by:

    1. Dmitriy Aleksandrovich Endovitskiy & Nikolay Petrovich Lyubushin & Nadezhda Evaldovna Babicheva & Tatyana Alekseevna Pozhidaeva, 2017. "The Quantitative Assessment of the Cyclical Development in Modern Conditions," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 13(4), pages 109-119.
    2. Yépez, Carlos A., 2017. "Financial conditions and labor productivity over the business cycle," Economics Letters, Elsevier, vol. 150(C), pages 34-38.
    3. Schwartzman, Felipe, 2014. "Time to produce and emerging market crises," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 37-52.
    4. Julia Thomas & Aubhik Khan, 2016. "(S,s) insights into the role of inventories in business cycles and high frequency fluctuations," 2016 Meeting Papers 662, Society for Economic Dynamics.
    5. Sarte, Pierre-Daniel & Schwartzman, Felipe & Lubik, Thomas A., 2015. "What inventory behavior tells us about how business cycles have changed," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 264-283.

    More about this item

    Keywords

    Inventories; Business Cycles; Investment Wedge; Financial Frictions;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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