Input and output inventory dynamics

Yi Wen

No 2008-008, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper develops an analytically-tractable general-equilibrium model of inventory dynamics based on a precautionary stockout-avoidance motive. The model?s predictions are broadly consistent with the U.S. business cycle and key features of inventory behavior, including (i) a large inventory stock-to-sales ratio and a small inventory investment-to-sales ratio in the long run, (ii) excess volatility of production relative to sales, (iii) procyclical inventory investment but countercyclical stock-to-sales ratio over the business cycle, and (iv) more volatile input inventories than output inventories. It is also shown that technological improvement of inventory management (that eliminates production/ordering lags) can increase, rather than decrease, the volatility of aggregate output. Key to this seemingly counter-intuitive result is that a stockout- avoidance motive leads to procyclical liquidity-value of inventories (hence, procyclical relative prices of output), which acts as an automatic stabilizer that discourages final sales in a boom and encourages final sales during a recession, thereby reducing the variability of GDP.

Keywords: Inventories; Business cycles (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Input and Output Inventory Dynamics (2011)
Working Paper: Input and output inventory dynamics (2011)
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DOI: 10.20955/wp.2008.008

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