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Trade inventories

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Abstract

We examine the behavior of trade inventories using both industry-level and high-frequency firm-level data. The cost structure underlying the firm's optimization problem--convex delivery costs vs. fixed costs of ordering--provides the two competing hypotheses. In the presence of fixed costs (S,s) inventory policies are optimal, and steady-state reduced-form predictions regarding the dynamics of inventories and sales can be used to test the model. The alternative of convex delivery costs is provided by structural estimation of a linear-quadratic (L-Q) model. At the industry level, the results are consistent with the reduced-form predictions of the (S,s) model, and structural parameter estimates obtained from Euler equation estimation indicate that the L-Q model does not fit the data. At the firm level, however, estimates of the structural cost parameters are economically plausible, statistically significant, and generate observationally equivalent dynamics of inventories and deliveries as those predicted by the steady-state reduced-form probability relationships derived from the (S,s) model.

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  • Jonathan McCarthy & Egon Zakrajšek, 1998. "Trade inventories," Staff Reports 53, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:53
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    Cited by:

    1. Jonathan McCarthy & Egon Zakrajšek, 2000. "Microeconomic inventory adjustment: evidence from U.S. firm-level data," Finance and Economics Discussion Series 2000-24, Board of Governors of the Federal Reserve System (U.S.).
    2. Jonathan McCarthy & Egon Zakrajšek, 1998. "Microeconomic inventory adjustment and aggregate dynamics," Staff Reports 54, Federal Reserve Bank of New York.
    3. Adam Fein, 2004. "The Myth of Decline: A New Perspective on the Supply Chain and Changing Inventory-Sales Ratios," Working Papers 04-18, Center for Economic Studies, U.S. Census Bureau, revised Feb 2005.
    4. Paula R. Worthington, 1998. "Inventories and output volatility," Working Paper Series WP-98-21, Federal Reserve Bank of Chicago.

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    Keywords

    Inventories;

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