Inventories as Factors of Production and Economic Fluctuations

Valerie Ramey

American Economic Review, 1989, vol. 79, issue 3, 338-54

Abstract: This paper presents a theory of inventory investment by stage-of-processing, and uses it to examine the role of inventory investment in economic fluctuations. The model, in which inventories are treated as factors of production, is estimated for four durable goods industries. Three conclusions emerge from the estimation. First, the estimates generally satisfy the theoretical restrictions. Second, the elasticity of inventory demand with respect to output is high, indicating an important accelerator effect. Finally, the estimates suggest that shifts in the demand for inventories are an important source of economic fluctuations. Copyright 1989 by American Economic Association.

Date: 1989
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