IDEAS home Printed from https://ideas.repec.org/p/fip/fedhma/wp-96-24.html
   My bibliography  Save this paper

(S, s) inventory policies in general equilibrium

Author

Listed:
  • Jonas D. M. Fisher
  • Andreas Hornstein

Abstract

We study the aggregate implications of (S,s) inventory policies in a dynamic general equilibrium model with aggregate uncertainty. Firms in the model's retail sector face idiosyncratic demand risk, and (S,s) inventory policies are optimal because of fixed order costs. The distribution of inventory holdings affects the aggregate outcome in two ways: variation in the decision to order and variation in the rate of sale through the pricing decisions of retailers. We find that both mechanisms must operate to reconcile observations that orders are more volatile than, and inventory investment is positively correlated with, sales, while remaining consistent with other salient business cycle characteristics. The model exhibits strong amplifications for some shocks, and persistence to a limited extent.

Suggested Citation

  • Jonas D. M. Fisher & Andreas Hornstein, 1996. "(S, s) inventory policies in general equilibrium," Working Paper Series, Macroeconomic Issues WP-96-24, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhma:wp-96-24
    as

    Download full text from publisher

    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/1996/wp96_24.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fair, Ray C., 1989. "The production-smoothing model is alive and well," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 353-370, November.
    2. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-1187, December.
    3. Lovell, Michael C., 1993. "Simulating the inventory cycle," Journal of Economic Behavior & Organization, Elsevier, vol. 21(2), pages 147-179, June.
    4. Jonas D. M. Fisher & Andreas Hornstein, 2000. "(S, s) Inventory Policies in General Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(1), pages 117-145.
    5. Christiano, Lawrence J. & Fisher, Jonas D. M., 2000. "Algorithms for solving dynamic models with occasionally binding constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 24(8), pages 1179-1232, July.
    6. 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.
    7. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    8. Krane, Spencer D & Braun, Stephen N, 1991. "Production Smoothing Evidence from Physical-Product Data," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 558-581, June.
    9. Bental, Benjamin & Eden, Benjamin, 1993. "Inventories in a Competitive Environment," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 863-886, October.
    10. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
    11. Andrew S. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(4), pages 703-725.
    12. Roland Benabou, 1992. "Inflation and Efficiency in Search Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(2), pages 299-329.
    13. Rogerson, Richard, 1987. "An Equilibrium Model of Sectoral Reallocation," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 824-834, August.
    14. Andrew Caplin & John Leahy, 1991. "State-Dependent Pricing and the Dynamics of Money and Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(3), pages 683-708.
    15. Lawrence J. Christiano & Terry J. Fitzgerald, 1989. "The magnitude of the speculative motive for holding inventories in a real business cycle model," Discussion Paper / Institute for Empirical Macroeconomics 10, Federal Reserve Bank of Minneapolis.
    16. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
    17. Caballero, Ricardo J, 1992. "A Fallacy of Composition," American Economic Review, American Economic Association, vol. 82(5), pages 1279-1292, December.
    18. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-417, June.
    19. David Laidler, 1994. "Why Do Agents Hold Money, and Why Does it Matter?," University of Western Ontario, Departmental Research Report Series 9401, University of Western Ontario, Department of Economics.
    20. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    21. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    22. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-679, September.
    23. Roland Benabou, 1988. "Search, Price Setting and Inflation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(3), pages 353-376.
    24. Caplin, Andrew S, 1985. "The Variability of Aggregate Demand with (S, s) Inventory Policies," Econometrica, Econometric Society, vol. 53(6), pages 1395-1409, November.
    25. Judd, Kenneth L., 1992. "Projection methods for solving aggregate growth models," Journal of Economic Theory, Elsevier, vol. 58(2), pages 410-452, December.
    26. Joel Sobel & Ichiro Takahashi, 1983. "A Multistage Model of Bargaining," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(3), pages 411-426.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhiwei Xu & Yi Wen & pengfei Wang, 2012. "When Do Inventories Destabilize the Economy? ---A Tractable Approach to (S,s) Policies," 2012 Meeting Papers 288, Society for Economic Dynamics.
    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. "Modeling Inventories Over the Business Cycle," NBER Working Papers 10652, National Bureau of Economic Research, Inc.
    4. Matteo Iacoviello & Fabio Schiantarelli & Scott Schuh, 2011. "Input And Output Inventories In General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(4), pages 1179-1213, November.
    5. Blinder, Alan S & Maccini, Louis J, 1991. "The Resurgence of Inventory Research: What Have We Learned?," Journal of Economic Surveys, Wiley Blackwell, vol. 5(4), pages 291-328.
    6. 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.
    7. Leonardo Auernheimer & Danilo Trupkin, 2014. "The Role of Inventories and Capacity Utilization as Shock Absorbers," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 70-85, January.
    8. Yi Wen, 2011. "Input and Output Inventory Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 181-212, October.
    9. Kenneth D. West, 1993. "Inventory Models," NBER Technical Working Papers 0143, National Bureau of Economic Research, Inc.
    10. Jonathan McCarthy & Egon Zakrajšek, 1998. "Microeconomic inventory adjustment and aggregate dynamics," Staff Reports 54, Federal Reserve Bank of New York.
    11. Andrew Caplin & John Leahy, 1999. "Durable Goods Cycles," NBER Working Papers 6987, National Bureau of Economic Research, Inc.
    12. Yi Wen, 2008. "Inventories, liquidity, and the macroeconomy," Working Papers 2008-045, Federal Reserve Bank of St. Louis.
    13. Yi Wen, 2007. "Production and Inventory Behavior of Capital," Annals of Economics and Finance, Society for AEF, vol. 8(1), pages 95-112, May.
    14. Alexander L. Wolman, 2007. "The frequency and costs of individual price adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 531-552.
    15. 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.
    16. Allen, Donald S., 1997. "A multi-sector inventory model," Journal of Economic Behavior & Organization, Elsevier, vol. 32(1), pages 55-87, January.
    17. Ben Malin, 2006. "Lower-Frequency Macroeconomic Fluctuations: Living Standards and Leisure," 2006 Meeting Papers 752, Society for Economic Dynamics.
    18. Scott Schuh, "undated". "Evidence on the Link between Firm-Level and Aggregate Inventory Behavior," Finance and Economics Discussion Series 1996-46, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    19. 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.
    20. Gérard P. Cachon & Taylor Randall & Glen M. Schmidt, 2007. "In Search of the Bullwhip Effect," Manufacturing & Service Operations Management, INFORMS, vol. 9(4), pages 457-479, April.

    More about this item

    Keywords

    Business cycles; Inventories;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedhma:wp-96-24. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lauren Wiese (email available below). General contact details of provider: https://edirc.repec.org/data/frbchus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.