Inventories and the Role of Goods-Market Frictions for Business Cycles

Wouter Den Haan

No 9628, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Investment in inventories is known to be important for observed changes in GDP. However, inventory investment and the possibility that firms may fail to sell all goods are typically ignored in business cycle models. Using US data, the ability to sell is shown to be strongly procyclical. By including both a goods-market friction and a standard labor-market search friction, the model developed here can---in principal---substantially magnify and propagate shocks, even when prices and wages are not sticky. Despite its simplicity, the model can also replicate key inventory facts. However, when these inventory facts are used to discipline the choice of parameter values, then the analysis indicates that the quantitative importance of goods-market frictions is not that large, at least not in this type of model without sticky prices and wages.

Keywords: Matching models; Search frictions; Magnification; Propagation (search for similar items in EconPapers)
JEL-codes: E12 E24 E32 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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