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Do Firms Smooth the Seasonal in Production in a Boom? Theory and Evidence

  • Stephen G. Cecchetti
  • Anil K Kashyap
  • David W. Wilcox

Using disaggregated production data we show that the size of seasonal cycles changes significantly over the course of the business cycle. In particular, during periods of high economy-wide activity, some industries smooth seasonal fluctuations while others exaggerate them. We interpret this finding using a simple analytical model that describes the conditions under which seasonal and cyclical fluctuations can be separated. Our model implies that seasonal fluctuations can safely be disentangled from cyclical fluctuations only when the marginal cost of production is linear, and the variation in demand and cost satisfy certain (restrictive) conditions. The model also suggests that inventory movements can be used to isolate the role of demand shifts in generating any interaction between seasonal cycles and business cycles. Thus, the empirical analysis involves studying the variation in seasonally unadjusted patterns of production and inventory accumulation over different phases of the business cycle. Our finding that seasonals shrink during booms and that firms carry more inventories into high sales seasons during a boom leads us to conclude that for several industries, marginal cost slopes up at an increasing rate. Conversely, in a couple of industries we find that seasonal swings in production are exaggerated during booms and that inventories are drawn down prior to high sales seasons, suggesting that marginal costs curves flatten as production increases. Overall, we find considerable evidence that there are non-linear interactions between business cycles and seasonal cycles.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5011.

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Date of creation: Feb 1995
Date of revision:
Publication status: published as American Economic Review, Vol. 87, no. 5 (December 1997): 884-892.
Handle: RePEc:nbr:nberwo:5011
Note: EFG ME
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
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  1. J. Joseph Beaulieu & Jeffrey A. Miron, 1990. "The Seasonal Cycle in U.S. Manufacturing," Papers 0012, Boston University - Industry Studies Programme.
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  4. J. Joseph Beaulieu & Jeffrey K. MacKie-Mason & Jeffrey A. Miron, 1991. "Why Do Countries and Industries with Large Seasonal Cycles Also Have Large Business Cycles?," NBER Working Papers 3635, National Bureau of Economic Research, Inc.
  5. Donald W.K. Andrews, 1994. "Hypothesis Testing with a Restricted Parameter Space," Cowles Foundation Discussion Papers 1060R, Cowles Foundation for Research in Economics, Yale University.
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  7. Fair, Ray C., 1989. "The production-smoothing model is alive and well," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 353-370, November.
  8. Timothy F. Bresnahan & Valerie A. Ramey, 1992. "Output Fluctuations at the Plant Level," NBER Working Papers 4105, National Bureau of Economic Research, Inc.
  9. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  10. Olivier J. Blanchard, 1982. "The Production and Inventory Behavior of the American Automobile Industry," NBER Working Papers 0891, National Bureau of Economic Research, Inc.
  11. Julio J. Rotemberg & Michael Woodford, 1993. "Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets," NBER Working Papers 4502, National Bureau of Economic Research, Inc.
  12. Alan S. Blinder, 1984. "Can The Production Smoothing Model of Inventory Behavior be Saved?," NBER Working Papers 1257, National Bureau of Economic Research, Inc.
  13. Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 306-34, April.
  14. Robert B. Barsky & Jeffrey A. Miron, 1988. "The Seasonal Cycle and the Business Cycle," NBER Working Papers 2688, National Bureau of Economic Research, Inc.
  15. Kenneth D. West, 1993. "Inventory Models," NBER Technical Working Papers 0143, National Bureau of Economic Research, Inc.
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