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Inventory Cycles

Author

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  • Katsuyuki Shibayama

Abstract

This paper investigates a rational dynamic stochastic general equilibrium model with a stockout constraint and a production chain. Our model shows that both stockout avoidance and cost shock mechanisms replicate stylised inventory facts -- production is more volatile than sales and inventory investment is procyclical. In addition, production smoothing also works at very high frequencies. Note that the cost shock and production smoothing mechanisms are naturally embedded in our micro-founded general equilibrium framework. Moreover, as a by-product, the production chain causes the slow adjustment of inventories in aggregate. Consequently, our model generates (a) high labour volatility and (b) low correlation between labour productivity and output; the standard RBC cannot produce these two empirical findings. Finally, our model yields inventory cycles.

Suggested Citation

  • Katsuyuki Shibayama, 2008. "Inventory Cycles," Studies in Economics 0804, School of Economics, University of Kent.
    • Handle: RePEc:ukc:ukcedp:0804
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    File URL: https://www.kent.ac.uk/economics/repec/0804.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Margaret M. McConnell & Gabriel Perez-Quiros, 2000. "Output fluctuations in the United States: what has changed since the early 1980s?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    3. Andrew B. Abel, 1985. "Inventories, Stock-Outs, and Production Smoothing," NBER Working Papers 1563, National Bureau of Economic Research, Inc.
    4. Wen, Yi, 2005. "Understanding the inventory cycle," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1533-1555, November.
    5. Terry J. Fitzgerald, 1997. "Inventories and the business cycle: an overview," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 11-22.
    6. Susanto Basu, 1996. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 719-751.
    7. Andreas Hornstein & Pierre-Daniel G. Sarte, 2001. "Sticky prices and inventories : production smoothing reconsidered," Working Paper 01-06, Federal Reserve Bank of Richmond.
    8. Andreas Hornstein, 1998. "Inventory investment and the business cycle," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 49-71.
    9. Andrew B. Abel, 1985. "Inventories, Stock-Outs and Production Smoothing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(2), pages 283-293.
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    Cited by:

    1. Fernandez-Corugedo, Emilio & McMahon, Michael & Millard, Stephen & Rachel, Lukasz, 2011. "Understanding the macroeconomic effects of working capital in the United Kingdom," The Warwick Economics Research Paper Series (TWERPS) 959, University of Warwick, Department of Economics.

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    More about this item

    Keywords

    inventories; inventory cycles; stockout constraint; production chain; over-damped oscillations; dyanamic stochastic general equilibrium model;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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