Input and Output Inventories in General Equilibrium

56 Pages Posted: 14 Nov 2010

See all articles by Matteo M. Iacoviello

Matteo M. Iacoviello

Federal Reserve Board - Trade and Financial Studies

Fabio Schiantarelli

Boston College - Department of Economics; IZA Institute of Labor Economics

Scott D. Schuh

Federal Reserve Bank of Boston - Research Department

Multiple version iconThere are 3 versions of this paper

Date Written: October 14, 2010

Abstract

We build and estimate a two-sector (goods and services) dynamic stochastic general equilibrium model with two types of inventories: materials (input) inventories facilitate the production of finished goods, while finished goods (output) inventories yield utility services. The model is estimated using Bayesian methods. The estimated model replicates the volatility and cyclicality of inventory investment and inventory-to-target ratios. Although inventories are an important element of the model's propagation mechanism, shocks to inventory efficiency or management are not an important source of business cycles. When the model is estimated over two subperiods (pre and post 1984), changes in the volatility of inventory shocks or in structural parameters associated with inventories, such as the input inventory to output ratio, play a small role in reducing the volatility of output.

Keywords: Inventories, business cycles, output volatility, Bayesian estimation, great moderation

JEL Classification: E22, E32, E37

Suggested Citation

Iacoviello, Matteo M. and Schiantarelli, Fabio and Schuh, Scott, Input and Output Inventories in General Equilibrium (October 14, 2010). FRB International Finance Discussion Paper No. 1004. Available at SSRN: https://ssrn.com/abstract=1708202 or http://dx.doi.org/10.2139/ssrn.1708202

Matteo M. Iacoviello (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Fabio Schiantarelli

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-4512 (Phone)
617-552-2308 (Fax)

HOME PAGE: http://https://sites.google.com/a/bc.edu/fabio-schiantarelli/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Scott Schuh

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Ave.
Boston, MA 02210
United States
617-973-3941 (Phone)
617-619-7541 (Fax)

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