Inventories and the role of goods-market frictions for business cycles

Wouter J. Den Haan

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Changes in the stock of inventories are important for fluctuations in aggregate output. However, the possibility that firms do not sell all produced goods and inventory accumulation are typically ignored in business cycle models. This paper captures this with a goods-market friction. Using US data, "goods-market efficiency" is shown to be strongly procyclical. By including both a goods-market friction and a standard labor-market search friction, the model developed can substantially magnify and propagate shocks. Despite its simplicity, the model can also replicate key inventory facts. However, when these inventory facts are used to discipline parameter values, then goods-market frictions are quantitatively not very important.

Keywords: matching models; search frictions; magnification propagation (search for similar items in EconPapers)
JEL-codes: E12 E24 E32 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2014-12-30
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:58231

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