The Role of Inventories in European Business Cycles: Evidence from 1999-2023

This paper examines the role of inventories in macroeconomic fluctuations across 29 European countries from 1999 to 2023, covering three major recessions. Using a novel panel dataset and dynamic panel-econometric methods, we analyse short- and long-run inventory behaviour. Results confirm the broadly pro-cyclical nature of inventories but reveal a more complex dynamic: inventories are initially depleted in response to demand shocks, followed by restocking and, in some cases, systematic correction after four quarters. During the Great Recession and Eurozone crisis, inventory depletion accounted for up to 80% of GDP losses, underscoring their amplifying role. In contrast, the COVID-19 recession featured limited de-stocking and earlier restocking, suggesting a structural shift in inventory strategies. These findings highlight inventories' dual role - as amplifiers or stabilizers - depending on the timing and nature of shocks, and call for greater attention to inventory dynamics in forecasting and policy design.