What Inventory Behavior Tells Us About How Business Cycles Have Changed

41 Pages Posted: 9 Mar 2014

See all articles by Thomas Lubik

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond

Pierre-Daniel G. Sarte

Federal Reserve Bank of Richmond

Felipe F. Schwartzman

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: March 2014

Abstract

Beginning in the mid-1980s, the nature of U.S. business cycles changed in important ways, as made evident by distinctive shifts in the comovement and relative volatilities of key economic aggregates. These include labor productivity, hours, output, and inventories. Unlike the widely documented change in absolute volatility over that period, known as the Great Moderation, these shifts in comovement and relative volatilities persist into the Great Recession. To understand these changes, we exploit the fact that inventory data are informative about sources of business cycles. Specifically, they provide additional information relative to aggregate investment regarding firms' intertemporal decisions. In this paper, we show that the "investment wedge" estimated with inventories, unlike previous measures, correlates well with established independent measures of credit market frictions. Furthermore, contrary to previous findings, our generalized investment wedge informed by inventory behavior plays a key role in explaining the shifts in U.S. business cycles observed after the mid-1980s.

Keywords: Business Cycles, Inventories, Investment Wedge, Financial Frictions

JEL Classification: E32, E44

Suggested Citation

Lubik, Thomas and Sarte, Pierre-Daniel and Schwartzman, Felipe F., What Inventory Behavior Tells Us About How Business Cycles Have Changed (March 2014). FRB Richmond Working Paper No. 14-06. Available at SSRN: https://ssrn.com/abstract=2406126 or http://dx.doi.org/10.2139/ssrn.2406126

Thomas Lubik (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Pierre-Daniel Sarte

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Felipe F. Schwartzman

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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