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Inventory investment and aggregate fluctuations with idiosyncratic shocks

  • 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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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 782.

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

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  1. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  2. Aubhik Khan & Julia K. Thomas, 2007. "Inventories and the Business Cycle: An Equilibrium Analysis of ( S , s ) Policies," American Economic Review, American Economic Association, vol. 97(4), pages 1165-1188, September.
  3. Aubhik Khan & Julia K. Thomas, 2004. "Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics," Staff Report 352, Federal Reserve Bank of Minneapolis.
  4. Wen, Yi, 2002. "Understanding the Inventory Cycle," Working Papers 02-04, Cornell University, Center for Analytic Economics.
  5. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  6. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
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