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Inventories and the business cycle: an equilibrium analysis of (S,s) policies

Author

Listed:
  • Aubhik Khan
  • Julia K. Thomas
Abstract
We develop an equilibrium business cycle model where producers of final goods pursue generalized (S,s) inventory policies with respect to intermediate goods due to nonconvex factor adjustment costs. When calibrated to reproduce the average inventory-to-sales ratio in postwar U.S. data, our model explains over half of the cyclical variability of inventory investment. Moreover, inventory accumulation is strongly procyclical, and production is more volatile than sales, as in the data. ; The comovement between inventory investment and final sales is often interpreted as evidence that inventories amplify aggregate fluctuations. In contrast, our model economy exhibits a business cycle similar to that of a comparable benchmark without inventories, though we do observe somewhat higher variability in employment, and lower variability in consumption and investment. Thus, our equilibrium analysis reveals that the presence of inventories does not substantially raise the cyclical variability of production, because it dampens movements in final sales.

Suggested Citation

  • Aubhik Khan & Julia K. Thomas, 2003. "Inventories and the business cycle: an equilibrium analysis of (S,s) policies," Staff Report 329, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:329
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    References listed on IDEAS

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    More about this item

    Keywords

    Equilibrium (Economics); Inventories; Business cycles - Econometric models;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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