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Inventory investment and aggregate fluctuations with idiosyncratic shocks

Listed author(s):
  • Julia K. Thomas

    (The Ohio State University)

  • Aubhik Khan

    (The Ohio State University)

An important insight of our analysis is that changes in the persistence and variability of idiosyncratic order costs and productivities alter the distribution of firms over inventory levels. This, in turn, affects the extent and speed of firms' responses to aggregate shocks, and thus the model's ability to reproduce high-frequency aspects of the aggregate data. When firms have greater certainty about their order costs, and when shifts in their relative productivities are transitory, they adjust their average inventory holdings faster following an aggregate shock. In such cases, the model succeeds not only with respect to the business cycle facts mentioned above, but also in reproducing two essential high-frequency observations, the negative correlation between sales and inventory investment and the greater volatility in sales relative to production.

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File URL: https://economicdynamics.org/meetpapers/2010/paper_782.pdf
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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 782.

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Date of creation: 2010
Handle: RePEc:red:sed010:782
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Aubhik Khan & Julia K. Thomas, 2003. "Inventories and the business cycle: an equilibrium analysis of (S,s) policies," Staff Report 329, Federal Reserve Bank of Minneapolis.
  2. Aubhik Khan & Julia K. Thomas, 2006. "Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics," 2006 Meeting Papers 294, Society for Economic Dynamics.
  3. Wen, Yi, 2005. "Understanding the inventory cycle," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1533-1555, November.
  4. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  5. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  6. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
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