Input and Output Inventory Dynamics

Federal Reserve Bank of St. Louis Working Paper Series No. 2011-008A

39 Pages Posted: 21 Mar 2011

See all articles by Yi Wen

Yi Wen

Federal Reserve Bank of St. Louis - Research Department; Tsinghua University

Multiple version iconThere are 2 versions of this paper

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

Wen, Yi, Input and Output Inventory Dynamics (March 15, 2011). Federal Reserve Bank of St. Louis Working Paper Series No. 2011-008A, Available at SSRN: https://ssrn.com/abstract=1787460 or http://dx.doi.org/10.2139/ssrn.1787460

Yi Wen (Contact Author)

Federal Reserve Bank of St. Louis - Research Department ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8559 (Phone)
314-444-8731 (Fax)

Tsinghua University ( email )

Beijing, 100084
China

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