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Inventory investment and the business cycle: the usual suspect

Listed author(s):
  • Frédérique Bec

    ()

    (THEMA - CREST - Centre de Recherche en Économie et Statistique - INSEE - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique)

  • Mélika Ben Salem

    (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - ENPC - École des Ponts ParisTech - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - ENS Paris - École normale supérieure - Paris, PSE - Paris School of Economics, ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12)

From quarterly postwar US and French data, this paper provides evidence of a bounce-back effect in inventory investment but not in final sales data. Actually, from a bounce-back augmented threshold model, it appears that i) the null hypothesis of no bounce-back effect is strongly rejected by the inventory investment data and ii) the one-step ahead forecasting performances of the models accounting for this bounce-back effect are well improved compared to linear or standard threshold autoregressions. This supports the conventional wisdom that inventory investment exacerbates aggregate fluctuations, in line with the recent theoretical models by, e.g., Wang and Wen (Wang, P., and Y. Wen. 2009. "Inventory Accelerator in General Equilibrium." Working Paper 010, Federal Reserve Bank of St. Louis) and Wang, Wen and Xu (Wang, P., Y. Wen, and Z. Xu. 2011. "When do Inventories Destabilize the Economy? An Analytical Approach to (s,s) Policies." Working Paper 014, Federal Reserve Bank of St. Louis) which clearly predict a destabilizing role of inventory investment over the business cycle. By contrast, our empirical findings cast doubt on models based on the stockouts avoidance motive for holding inventories.

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Paper provided by HAL in its series Post-Print with number halshs-00846501.

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Date of creation: Apr 2013
Publication status: Published in Studies in Nonlinear Dynamics and Econometrics, MIT Press, 2013, 17 (3), pp.335-343. <10.1515/snde-2012-0041>
Handle: RePEc:hal:journl:halshs-00846501
DOI: 10.1515/snde-2012-0041
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00846501
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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  1. Oleksiy Kryvtsov & Virgiliu Midrigan, 2013. "Inventories, Markups, and Real Rigidities in Menu Cost Models," Review of Economic Studies, Oxford University Press, vol. 80(1), pages 249-276.
  2. Kryvtsov, Oleksiy & Midrigan, Virgiliu, 2010. "Inventories and real rigidities in New Keynesian business cycle models," Journal of the Japanese and International Economies, Elsevier, vol. 24(2), pages 259-281, June.
  3. James A. Kahn & Mark Bils, 2000. "What Inventory Behavior Tells Us about Business Cycles," American Economic Review, American Economic Association, vol. 90(3), pages 458-481, June.
  4. Frédérique BEC & Othman BOUABDALLAH & Laurent FERRARA, 2011. "The Possible Shapes of Recoveries in Markov-Switching Models," Working Papers 2011-02, Centre de Recherche en Economie et Statistique.
  5. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
  6. Jeremy Piger & James Morley & Chang-Jin Kim, 2005. "Nonlinearity and the permanent effects of recessions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 291-309.
  7. Costantini, Mauro & Kunst, Robert M., 2011. "On the Usefulness of the Diebold-Mariano Test in the Selection of Prediction Models," Economics Series 276, Institute for Advanced Studies.
  8. James Morley & Jeremy Piger, 2012. "The Asymmetric Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 208-221, February.
  9. Cooper, Russell W. & Haltiwanger, John Jr., 1992. "Macroeconomic implications of production bunching : Factor demand linkages," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 107-127, October.
  10. Inoue, Atsushi & Kilian, Lutz, 2006. "On the selection of forecasting models," Journal of Econometrics, Elsevier, vol. 130(2), pages 273-306, February.
  11. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-679, September.
  12. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
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