Using Inventories to Help Explain Post-1984 Business Cycles

Thomas Lubik, Karl Rhodes, Pierre Daniel Sarte and Felipe Schwartzman

Richmond Fed Economic Brief, 2016, issue June

Abstract: Real business cycle (RBC) models have been highly successful at explaining business cycles that occurred before 1984. But since then, shifts in comovements and relative volatilities of key economic aggregates have challenged their preeminence. One possible refinement of the standard RBC model is to include multiple stages of production. This extension allows researchers to use inventory data to estimate the discount rate that firms use to assess future income streams. The results indicate that variations in the discount rate reflect financial frictions that have become significant drivers of business cycles.

Date: 2016
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