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Inventories

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  • Valerie A. Ramey
  • Kenneth D. West
Abstract
We review and interpret recent work on inventories, emphasizing empirical and business cycle aspects. We begin by documenting two empirical regularities about inventories. The first is the well-known one that inventories move procyclically. The second is that inventory movements are quite persistent, even conditional on sales. To consider explanations for the two facts, we present a linear-quadratic model. The model can rationalize the two facts in many ways, but two stylized explanations are simple enough and have support support from a number of papers. Both assume that there are persistent shocks to demand for the good in question, and that marginal production cost slopes up. The first explanation assumes as well that there are highly persistent shocks to the cost of production. The second assumes that there are strong costs of adjusting production and a strong accelerator motive. Research to to date, however, has not reached a consensus on whether one of these two, or some third, alternative provides a satisfactory explanation of inventory behavior. We suggest several directions for future research that promise to improve our understanding of inventory behavior and thus of business cycles.

Suggested Citation

  • Valerie A. Ramey & Kenneth D. West, 1997. "Inventories," NBER Working Papers 6315, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6315
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    More about this item

    JEL classification:

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

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