IDEAS home Printed from
   My bibliography  Save this paper

Inventory Fluctuations, Temporary Layoffs and the Business Cycle


  • Martin Feldstein
  • Alan J. Auerbach


Firms respond to fluctuations in demand by changing their inventories and their levels of production. The relative magnitudes of the inventory and production responses have important implications for the overall cyclical behavior of the economy. Government policies that affect the costs of holding inventories and the costs of the temporary layoffs that accompany reductions in the level of output can therefore have significant effects on the magnitude of aggregate fluctuations. The current paper presents new econometric evidence on the nature of inventory adjustments and then examines how changes in inventory behavior affect the overall business cycle. The analysis in this paper was motivated by our discovery that the parameter estimates of the traditional productional adjustment model are not consistent with the observed magnitudes of inventory change and the production. We have shown here that this production adjustment model is a special case of a more general two-speed adjustment process in which both production and inventory targets adjust slowly. Our estimates of the two-speed model clearly reject the production adjustment model in favor of the target adjustment model in which the inventory target adjusts slowly to changes in sales but production adjusts rapidly to changes in the desired inventory. Our analysis of the spectral properties of a simple macroeconomic model show that the production adjustment model and the target adjustment model can imply quite different cyclical behavior of the economy as a whole. Depending on the autocorrelation of the disturbance, government policies that reduce the speed with which production responds to changes in desired inventories and that place greater reliance on inventory adjustment may stabilize national income. Further analysis of these questions with more realistic models would clearly be desirable.

Suggested Citation

  • Martin Feldstein & Alan J. Auerbach, 1978. "Inventory Fluctuations, Temporary Layoffs and the Business Cycle," NBER Working Papers 0259, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0259
    Note: PE

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. George A. Hay, 1970. "Adjustment Costs and the Flexible Accelerator," The Quarterly Journal of Economics, Oxford University Press, vol. 84(1), pages 140-143.
    2. Feldstein, Martin S, 1976. "Temporary Layoffs in the Theory of Unemployment," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 937-957, October.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0259. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: () or (Joanne Lustig). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.