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Inventory Investment and the Real Interest Rate

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  • Junayed, Sadaquat
  • Khan, Hashmat

Abstract

The relationship between inventory investment and the real interest rate has been difficult to assess empirically. Recent work has proposed a linear-quadratic inventory model with time-varying discount factor to identify the effects of real interest rate on inventory investment. The authors show that this framework does not separately identify the effects of real interest rate on inventory investment from variables that determine the expected marginal cost of production. Consequently, understanding the relationship between inventory investment and the real interest rate continues to be a challenge for macroeconomists.

Suggested Citation

  • Junayed, Sadaquat & Khan, Hashmat, 2009. "Inventory Investment and the Real Interest Rate," Economics Discussion Papers 2009-23, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwedp:7587
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    References listed on IDEAS

    as
    1. Miron, Jeffrey A & Zeldes, Stephen P, 1988. "Seasonality, Cost Shocks, and the Production Smoothing Models of Inventories," Econometrica, Econometric Society, vol. 56(4), pages 877-908, July.
    2. Ramey, Valerie A. & West, Kenneth D., 1999. "Inventories," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 13, pages 863-923 Elsevier.
    3. James A. Kahn & Mark Bils, 2000. "What Inventory Behavior Tells Us about Business Cycles," American Economic Review, American Economic Association, vol. 90(3), pages 458-481, June.
    4. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
    5. James A. Kahn, 1992. "Why is Production More Volatile than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 481-510.
    6. Louis J. Maccini & Bartholomew J. Moore & Huntley Schaller, 2004. "The Interest Rate, Learning, and Inventory Investment," American Economic Review, American Economic Association, vol. 94(5), pages 1303-1327, December.
    7. Akhtar, M A, 1983. "Effects of Interest Rates and Inflation on Aggregate Inventory Investment in the United States," American Economic Review, American Economic Association, vol. 73(3), pages 319-328, June.
    8. Ramey, Valerie A, 1989. "Inventories as Factors of Production and Economic Fluctuations," American Economic Review, American Economic Association, vol. 79(3), pages 338-354, June.
    9. Eichenbaum, Martin, 1989. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," American Economic Review, American Economic Association, vol. 79(4), pages 853-864, September.
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    More about this item

    Keywords

    Inventory investment; real interest rate;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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