Studies in Economics from School of Economics, University of Kent
This paper investigates a rational dynamic stochastic general equilibrium model with a stockout constraint and a production chain. Our model shows that both stockout avoidance and cost shock mechanisms replicate stylised inventory facts -- production is more volatile than sales and inventory investment is procyclical. In addition, production smoothing also works at very high frequencies. Note that the cost shock and production smoothing mechanisms are naturally embedded in our micro-founded general equilibrium framework. Moreover, as a by-product, the production chain causes the slow adjustment of inventories in aggregate. Consequently, our model generates (a) high labour volatility and (b) low correlation between labour productivity and output; the standard RBC cannot produce these two empirical findings. Finally, our model yields inventory cycles.
Keywords: inventories; inventory cycles; stockout constraint; production chain; over-damped oscillations; dyanamic stochastic general equilibrium model (search for similar items in EconPapers)
JEL-codes: E32 C68 (search for similar items in EconPapers)
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:ukc:ukcedp:0804
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