Inventory Cycles and Business Cycles – Has the relationship lost its importance over the years: A Time-Varying Parameter Approach using U.S. Data

Parijat Maitra (naveen@mse.ac.in) and Naveen Srinivasan
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Parijat Maitra: IIM-A

Working Papers from Madras School of Economics,Chennai,India

Abstract: Despite widespread recognition that fluctuations in inventories are one of the primary drivers of business cycles and the introduction of Just-In-Time (JIT) Production system in the 1980s has resulted in declining inventory to sales ratio, suggesting that the role of inventories in generating business cycles may be diminishing, surprisingly very little empirical work has been done to investigate how this relationship has varied over the years. In this study we use U.S. Business cycle and Inventory to sales ratio data from 1967 Q1 to 1996 Q4 and estimate their relationship in a Time-Varying Parameter framework. We find that the importance of inventory cycles w.r.t business cycles has declined over the years, with multiple structural breaks observed in the 1970s and the 1980s. However, our estimates also show that despite the decline in the strength of the relationship, fluctuations in inventories are still an important factor in business cycles, particularly in recessions.

Keywords: Inventory to Sales Ratios; Inventory; Business Cycles; Trend Breaks (search for similar items in EconPapers)
JEL-codes: E00 E32 E37 (search for similar items in EconPapers)
Pages: 32` pages
Date: 2020-06
New Economics Papers: this item is included in nep-mac
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