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Macroeconomic Implications of Production Bunching

  • Russell Cooper
  • John C. Haltiwanger

The literature on inventory holdings stresses their role in smoothing production when costs are convex. Existing empirical evidence suggests that output is more variable than consumption so that production smoothing is not apparently present. One way of explaining this finding is to allow for nonconvex technologies. In this paper, we investigate some macroeconomic implications of the proposition that at least some firms in the economy produce with non-convex technologies. We begin our analysis by studying a simple Robinson Crusoe economy with a single, storable good which is produced from a non-convex technology. The single agent can produce a finite amount of output simply by incurring a fixed production cost. We demonstrate that the efficient solution to this problem will entail periods of production followed by periods of inactivity: i.e. production will be bunched rather than smoothed. More importantly, inventories will be used to smooth consumption relative to this production path. Still, as long as the agent discounts the future or inventories depreciate over time, consumption will not be totally smooth. Instead, consumption will be highest in periods of production. Thus the non-convex technology will induce fluctuations in both production and consumption. Using this analysis as a starting point, we then consider the implications of a non -convex technology in one sector of the economy for the behavior of other sectors through intersectoral technological linkages for both centralized and decentralized economies. For the centralized setting, the extent to which non- convexities spillover to other sectors depends on the degree to which intermediate and final goods can be inventoried and the nature of the technological interaction between factors. For the decentralized economy, the production of inputs which are strategic complements (substitutes) will be synchronized (staggered). Thus the presence of strategic complementarities (as in imperfectly competitive markets) will imply that non-convexities will have aggregate implications.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2976.

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Date of creation: May 1989
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Publication status: published as Journal of Monetary Economics 30, pp. 107-127 (1992).
Handle: RePEc:nbr:nberwo:2976
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  1. Valerie A. Ramey & Kenneth D. West, 1997. "Inventories," NBER Working Papers 6315, National Bureau of Economic Research, Inc.
    • Ramey, Valerie A. & West, Kenneth D., 1999. "Inventories," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 13, pages 863-923 Elsevier.
  2. Chatterjee, Satyajit & Ravikumar, B., 1992. "A neoclassical model of seasonal fluctuations," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 59-86, February.
  3. Kenneth D. West, 1985. "A Variance Bounds Test of the Linear Quardractic Inventory Model," NBER Working Papers 1581, National Bureau of Economic Research, Inc.
  4. Martin S. Eichenbaum, 1988. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," NBER Working Papers 2523, National Bureau of Economic Research, Inc.
  5. Robert B. Barsky & Jeffrey A. Miron, 1988. "The Seasonal Cycle and the Business Cycle," NBER Working Papers 2688, National Bureau of Economic Research, Inc.
  6. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
  7. Olivier J. Blanchard, 1987. "Why Does Money Affect Output? A Survey," Working papers 453, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  9. Bryant, John, 1983. "A Simple Rational Expectations Keynes-Type Model," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 525-28, August.
  10. Caplin, Andrew S, 1985. "The Variability of Aggregate Demand with (S, s) Inventory Policies," Econometrica, Econometric Society, vol. 53(6), pages 1395-1409, November.
  11. Weitzman, Martin L, 1982. "Increasing Returns and the Foundations of Unemployment Theory," Economic Journal, Royal Economic Society, vol. 92(368), pages 787-804, December.
  12. Hart, Oliver, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 109-38, February.
  13. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1989. "Increasing Returns, Durables and Economic Fluctuations," NBER Working Papers 3014, National Bureau of Economic Research, Inc.
  14. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  15. Robert E. Hall, 1989. "Temporal Agglomeration," NBER Working Papers 3143, National Bureau of Economic Research, Inc.
  16. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large Fixed Costs," Econometrica, Econometric Society, vol. 56(3), pages 549-69, May.
  17. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  18. Blinder, Alan S. & Fischer, Stanley, 1981. "Inventories, rational expectations, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 277-304.
  19. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
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