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What inventories tell us about aggregate fluctuations -- a tractable approach to (S,s) policies

Pengfei Wang (), Yi Wen and Zhiwei Xu ()

No 2012-059, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We estimate a DSGE model with (S,s) inventory policies. We find that (i) taking inventories into account can significantly improve the empirical fit of DSGE models in matching the standard business-cycle moments (in addition to explaining inventory fluctuations); (ii) (S,s) inventory policies can significantly amplify aggregate output fluctuations, in contrast to the findings of the recent general-equilibrium inventory literature; and (iii) aggregate demand shocks become more important than technol- ogy shocks in explaining the business cycle once inventories are incorporated into the model. An independent contribution of our paper is that we develop a solution method for analytically solving (S,s) inventory policies in general-equilibrium models with het- erogeneous firms and a large aggregate state space, and we illustrate how standard log-linearization methods can be used to solve various versions of our inventory model, generate impulse response functions, and estimate the model?s deep structural para- meters.

Keywords: Inventories (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-dge and nep-mac
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Journal Article: What inventories tell us about aggregate fluctuations—A tractable approach to (S,s) policies (2014) Downloads
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