Inventory Investment Dynamics and Recoveries: A Comparison of Manufacturing and Retail Trade Sectors

Abstract

This paper explores the existence of a bounce-back effect in inventory investment using the European Commission opinion survey on stocks of finished products in manufacturing and retail trade sectors. The data are quarterly balance for France, Germany and a European aggregate, from 1985q1 to 2011q4. Our empirical findings support the existence of a high recovery episode for inventory investment, during the quarters immediately following the recessions. This could in turn explain the real GDP growth rate bounce-back pointed out in previous empirical studies. Moreover, according to our estimates, the inventory investment bounce-back occurs later and lasts longer in manufacturing than in retail trade sector.

Keywords: threshold auto-regression, bounce-back effects, business cycles, inventory investment

JEL Classification: C22, E32