Inventories and the business cycle: an equilibrium analysis of (S,s) policies

Aubhik Khan and Julia Thomas

No 329, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We develop an equilibrium business cycle model where producers of final goods pursue generalized (S,s) inventory policies with respect to intermediate goods due to nonconvex factor adjustment costs. When calibrated to reproduce the average inventory-to-sales ratio in postwar U.S. data, our model explains over half of the cyclical variability of inventory investment. Moreover, inventory accumulation is strongly procyclical, and production is more volatile than sales, as in the data. ; The comovement between inventory investment and final sales is often interpreted as evidence that inventories amplify aggregate fluctuations. In contrast, our model economy exhibits a business cycle similar to that of a comparable benchmark without inventories, though we do observe somewhat higher variability in employment, and lower variability in consumption and investment. Thus, our equilibrium analysis reveals that the presence of inventories does not substantially raise the cyclical variability of production, because it dampens movements in final sales.

Keywords: Equilibrium (Economics); Inventories; Business cycles - Econometric models (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Inventories and the Business Cycle: An Equilibrium Analysis of ( S, s ) Policies (2007)
Working Paper: Inventories and the business cycle: an equilibrium analysis of (S,s) policies (2004)
Working Paper: Inventories and the Business Cycle: An Equilibrium Analysis of (S,s) Policies (2003)
Working Paper: Inventories and the business cycle: an equilibrium analysis of (S,s) policies (2002)
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