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Modeling Inventories Over the Business Cycle

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  • Julia K. Thomas
  • Aubhik Khan

    (Research Federal Reserve Bank of Philadelphia)

Abstract

We evaluate two leading models of aggregate fluctuations with inventories in general equilibrium: the (S,s) model and the stockout avoidance model. Each is judged by its ability to explain the observed magnitude of inventories in the U.S. economy, alongside other empirical regularities such as the procyclicality of inventory investment and its positive correlation with sales. We find that the (S,s) model is far more consistent with the behavior of aggregate inventories in the postwar U.S. when aggregate fluctuations arise from technology, rather than preference, shocks. The converse holds for the stockout avoidance model. The (S,s) model performs well with respect to the inventory facts and other business cycle regularities. By contrast, the essential risk motive in the stockout avoidance model is insufficient to generate inventory holdings near the data without destroying the model's performance elsewhere, suggesting a fundamental problem in using reduced-form inventory models with stocks rationalized by this motive.
(This abstract was borrowed from another version of this item.)

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  • Julia K. Thomas & Aubhik Khan, 2005. "Modeling Inventories Over the Business Cycle," 2005 Meeting Papers 182, Society for Economic Dynamics.
    • Handle: RePEc:red:sed005:182
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    References listed on IDEAS

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    Cited by:

    1. Liu, Wen-Hsien & Chung, Ching-Fan & Chang, Kuang-Liang, 2013. "Inventory change, capacity utilization and the semiconductor industry cycle," Economic Modelling, Elsevier, vol. 31(C), pages 119-127.
    2. Marcel Förster, 2013. "The Great Moderation: Inventories, Shocks or Monetary Policy?," MAGKS Papers on Economics 201348, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Yi Wen, 2007. "Granger causality and equilibrium business cycle theory," Review, Federal Reserve Bank of St. Louis, vol. 89(May), pages 195-206.
    4. Chikán, Attila & Kovács, Erzsébet & Matyusz, Zsolt & Sass, Magdolna & Vakhal, Péter, 2016. "Long-term trends in inventory investment in traditional market and post-socialist economies," International Journal of Production Economics, Elsevier, vol. 181(PA), pages 14-23.
    5. Bivin, David G., 2008. "Production stability in a supply-chain environment," International Journal of Production Economics, Elsevier, vol. 114(1), pages 265-275, July.

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    More about this item

    Keywords

    Inventories; Business Cycles; (S; s); Stockout-avoidance;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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