Inventory dynamics and business cycles: what has changed?

Jonathan McCarthy and Egon Zakrajšek
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Egon Zakrajšek: https://www.bostonfed.org/people/bank/egon-zakrajsek.aspx

No 2003-26, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Despite the recent patch of sluggish growth, the U.S. economy has experienced a period of remarkable stability since the mid-1980s. One popular explanation attributes the diminished variability of economic activity to information-technology-led improvements in inventory management. Our results, however, indicate that the changes in inventory dynamics since the mid-1980s played a reinforcing---rather than a leading---role in the volatility reduction. Movements in the volatility of manufacturing output over the past three decades almost entirely reflect changes in the variability of the growth contribution of sales. Although the volatility of total inventory investment has fallen, the decline occurred well before the mid-1980s and was driven by the reduced variability of materials and supplies. Our analysis does show that since the mid-1980s, inventory dynamics have played a role in stabilizing manufacturing production: Inventory ``imbalances'' tend to correct more rapidly, and the quicker response of inventories to monetary policy and commodity price shocks buffers production from fluctuations in sales to a greater extent. But more extensive production smoothing and faster dissolution of inventory imbalances appear to be a consequence of changes in the way industry-level sales and aggregate economic activity respond to shocks, rather than a cause of changes in macroeconomic behavior.

Keywords: Business cycles; Inventories (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Inventory Dynamics and Business Cycles: What Has Changed? (2007)
Journal Article: Inventory Dynamics and Business Cycles: What Has Changed? (2007)
Working Paper: Inventory dynamics and business cycles: what has changed? (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2003-26

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