Inventories and the business cycle
Subtitle: an equilibrium analysis of (S, s) policies
By: Aubhik Khan and Julia K. Thomas.
Contributors: Thomas, Julia K.
Series: Working paper ;; no. 04-11; Working paper (Federal Reserve Bank of Philadelphia : Online) ;; no. 04-11.
Publisher: Federal Reserve Bank of Philadelphia
Published: 2004
Place of publication: Philadelphia, PA
Language: eng
Format: Electronic resource
Subjects: Inventories -- United States -- Econometric models.; Business cycles -- United States -- Econometric models.
Description: "We develop an equilibrium  business cycle model in which the producers of final goods pursue generalized  (S,s) inventory policies with respect to intermediate goods, a consequence of  nonconvex factor adjustment costs.  Calibrating our model to reproduce the  average inventory-to-sales ratio in postwar U.S.  data, we find that it explains  over half of the cyclical variability of inventory investment.  Moreover,  inventory accumulation is strongly procyclical, and production is more volatile  than sales, as in the data.       The comovement  between inventory investment and final sales is often interpreted as evidence  that inventories amplify aggregate fluctuations.  In contrast, our model economy  exhibits a business cycle similar to that of a comparable benchmark without  inventories, though we do observe somewhat higher variability in employment,  and lower variability in consumption and investment.  Thus, equilibrium  analysis, which necessarily endogenizes final sales, alters our understanding  of the role of inventory accumulation for cyclical movements in GDP.  The  presence of inventories does not substantially raise the variability of  production, because it dampens movements in final sales.  Similarly, when  reductions in adjustment costs lower, but do not eliminate, average inventory  holdings, the variability of GDP is essentially unchanged, because the reduced  costs cause an o.setting rise in the variability of final sales"--Federal Reserve Bank of Philadelphia web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 1/26/2005.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.