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What Inventory Behavior Tells Us About Business Cycles

  • Mark Bils
  • James A. Kahn

Manufacturers' finished goods inventories move less than shipments over the business cycle. We argue that this requires marginal cost to be more procyclical than is conventionally measured. We construct, for six manufacturing industries, alternative measures of marginal cost that attribute high-frequency productivity shocks to procyclical work effort, and find that they are much more successful in accounting for inventory behavior. The difference is attributable to cyclicality in the shadow price of labor, not to diminishing returns in fact, parametric evidence suggests that the short-run slope of marginal cost is close to zero for five of the six industries. Moreover, while our measures of marginal cost are procyclical relative to output price, they are too persistent for intertemporal substitution to be important. We conclude that countercyclical markups are chiefly responsible for the sluggish response of inventory stocks over the cycle.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7310.

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Date of creation: Aug 1999
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Publication status: published as Bils, Mark and James A. Kahn. "What Inventory Behavior Tells Us About Business Cycles," American Economic Review, 2000, v90(3,Jun), 458-481.
Handle: RePEc:nbr:nberwo:7310
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