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An Empirical Model of Inventory Investment by Durable Commodity Intermediaries

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  • George Hall

    (Yale University)

  • John Rust

    (Yale University)

Abstract

We present a new detailed data set of high-frequency observations on inventory investment by a U.S. steel wholesaler. Our analysis of the data leads to six main conclusions: orders and sales are made infrequently; orders are more volatile than sales; order sizes vary considerably; there is considerable day-to-day variability in sales prices; inventory/sales ratios are unstable; and there are occasional stockouts. We model the firm generically as a durable commodity intermediary. We demonstrate that the firm's behavior at the product level is well approximated by an optimal trading strategy derived from a multi-dimensional nonlinear dynamic programming problem with continuous state and control variables which are subject to frequently binding inequality constraints. We show that the optimal trading strategy takes the form of a generalized (S,s) rule in which the (S,s) bands are decreasing functions of the spot price. We simulate a calibrated version of this model, and show that the simulated data exhibit the key features of inventory investment we observe in our data.

Suggested Citation

  • George Hall & John Rust, 1999. "An Empirical Model of Inventory Investment by Durable Commodity Intermediaries," Macroeconomics 9904005, EconWPA.
  • Handle: RePEc:wpa:wuwpma:9904005 Note: TeX file, Postscript version submitted, 40 pages
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    References listed on IDEAS

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    2. Miron, Jeffrey A & Zeldes, Stephen P, 1988. "Seasonality, Cost Shocks, and the Production Smoothing Models of Inventories," Econometrica, Econometric Society, pages 877-908.
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    4. Blinder, Alan S, 1986. "More on the Speed of Adjustment in Inventory Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(3), pages 355-365, August.
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    Citations

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    Cited by:

    1. Oleksiy Kryvtsov & Virgiliu Midrigan, 2013. "Inventories, Markups, and Real Rigidities in Menu Cost Models," Review of Economic Studies, Oxford University Press, vol. 80(1), pages 249-276.
    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, pages 1165-1188.
    3. George Hall and John Rust, Yale University, 2001. "Econometric Methods for Endogenously Sampled Time Series: The Case of Commodity Price Speculation in the Steel Market," Computing in Economics and Finance 2001 274, Society for Computational Economics.
    4. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2010. "Inventories, Lumpy Trade, and Large Devaluations," American Economic Review, American Economic Association, pages 2304-2339.
    5. Gautier, Erwan & Le Bihan, Hervé, 2011. "Time-varying (S, s) band models: Properties and interpretation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 394-412, March.
    6. Gautier, E. & Le Bihan, H., 2009. "Time-varying (S, s) band models: empirical properties and interpretation," Working papers 231, Banque de France.
    7. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2010. "Inventories, Lumpy Trade, and Large Devaluations," American Economic Review, American Economic Association, pages 2304-2339.
    8. Florian Zettelmeyer & Fiona Scott Morton & Jorge Silva-Risso, 2006. "Scarcity Rents in Car Retailing: Evidence from Inventory Fluctuations at Dealerships," NBER Working Papers 12177, National Bureau of Economic Research, Inc.
    9. John Rust & George Hall, 2003. "Middlemen versus Market Makers: A Theory of Competitive Exchange," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 353-403, April.
    10. Blume, Lawrence E. & Easley, David & Kleinberg, Jon & Tardos, Éva, 2009. "Trading networks with price-setting agents," Games and Economic Behavior, Elsevier, vol. 67(1), pages 36-50, September.
    11. Ejarque, João Miguel, 2011. "Evaluating the economic cost of natural gas strategic storage restrictions," Energy Economics, Elsevier, vol. 33(1), pages 44-55, January.
    12. Jia Yan & John Liu, 2008. "Instability of Dynamic Inventory Systems," Working Papers 2008-23, School of Economic Sciences, Washington State University.

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    JEL classification:

    • H5 - Public Economics - - National Government Expenditures and Related Policies

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