Input and Output Inventory Dynamics
Federal Reserve Bank of St. Louis Working Paper Series No. 2011-008A
39 Pages Posted: 21 Mar 2011
There are 2 versions of this paper
Input and Output Inventory Dynamics
Date Written: March 15, 2011
Abstract
This paper develops an analytically tractable general-equilibrium model of inventory dynamics based on a precautionary stockout-avoidance motive. The model’s predictions are broadly consistent with the U.S. business cycle and key features of inventory behavior. It is also shown that technological improvement of inventory management can increase, rather than decrease, the volatility of aggregate output. Key to this seemingly counterintuitive result is that a stockout-avoidance motive leads to a procyclical shadow value of inventories, which acts as an automatic stabilizer that discourages sales in booms and encourages demand in recessions, thereby reducing the variability of GDP.
Keywords: Input-and-Output Inventories, Stockout Avoidance, Countercyclical Stock-to-Sales Ratio, Great Moderation, Business Cycle
JEL Classification: D57, E13, E22, E32
Suggested Citation: Suggested Citation
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