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Spread Too Thin: The Impact of Lean Inventories

Julio Ortiz

No 1342, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Widespread adoption of just-in-time (JIT) production has reduced inventory holdings. This paper finds that JIT creates a trade-off between firm profitability and vulnerability to large shocks. Empirically, JIT adopters experience higher sales and less volatility while also exhibiting heightened cyclicality and sensitivity to natural disasters. I explain these facts in a structurally estimated general equilibrium model where firms can adopt JIT. Relative to a no-JIT economy, the estimated model implies a 1.3% increase in firm value. At the same time, an unanticipated shock results in a roughly 15% deeper output contraction. This occurs because firms "stock out" or hoard materials.

Keywords: Inventory investment; Firm dynamics; Just-in-time production (search for similar items in EconPapers)
JEL-codes: D25 E22 G30 (search for similar items in EconPapers)
Pages: 74 p.
Date: 2022-04-20
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1342

DOI: 10.17016/IFDP.2022.1342

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