What Inventory Behavior Tells Us About Business Cycles

48 Pages Posted: 30 Apr 2000 Last revised: 24 Jun 2010

See all articles by Mark Bils

Mark Bils

University of Rochester - Department of Economics; National Bureau of Economic Research (NBER)

James A. Kahn

Yeshiva University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1999

Abstract

Manufacturers' finished goods inventories move less than shipments over the business cycle. We argue that this requires marginal cost to be more procyclical than is conventionally measured. We construct, for six manufacturing industries, alternative measures of marginal cost that attribute high-frequency productivity shocks to procyclical work effort, and find that they are much more successful in accounting for inventory behavior. The difference is attributable to cyclicality in the shadow price of labor, not to diminishing returns in fact, parametric evidence suggests that the short-run slope of marginal cost is close to zero for five of the six industries. Moreover, while our measures of marginal cost are procyclical relative to output price, they are too persistent for intertemporal substitution to be important. We conclude that countercyclical markups are chiefly responsible for the sluggish response of inventory stocks over the cycle.

Suggested Citation

Bils, Mark and Kahn, James A., What Inventory Behavior Tells Us About Business Cycles (August 1999). NBER Working Paper No. w7310. Available at SSRN: https://ssrn.com/abstract=197928

Mark Bils (Contact Author)

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627-0158
United States

National Bureau of Economic Research (NBER)

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James A. Kahn

Yeshiva University ( email )

500 West 185th Street
New York, NY 10033
United States
212-340-7863 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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