(S, S) Inventory Policies in General Equilibrium

Posted: 19 Nov 2000

See all articles by Jonas D. M. Fisher

Jonas D. M. Fisher

Federal Reserve Bank of Chicago - Economic Research Department

Andreas Hornstein

Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Abstract

We study the aggregate implications of (S, s) inventory policies in a dynamic general equilibrium model with aggregate uncertainty. Firms in the model's retail sector face idiosyncratic demand risk, and (S, s) inventory policies are optimal because of fixed order costs. The distribution of inventory holdings affects the aggregate outcome in two ways: variation inthe decision to order and variation in the rate of sale through the pricing decisions of retailers. We find that both mechanisms must operate to reconcile observations that orders are more volatile than, and inventory investment is positively correlated with, sales, while remaining consistent with other salient business cycle characteristics. The model exhibits strong amplification for some shocks and persistence to a limited extent.

JEL Classification: E22

Suggested Citation

Fisher, Jonas D. M. and Hornstein, Andreas, (S, S) Inventory Policies in General Equilibrium. Review of Economic Studies, Vol. 67, Issue 1, January 2000. Available at SSRN: https://ssrn.com/abstract=234858

Jonas D. M. Fisher (Contact Author)

Federal Reserve Bank of Chicago - Economic Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States

Andreas Hornstein

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8266 (Phone)
804-697-8255 (Fax)

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