Working Paper: NBER ID: w0460
Authors: Alan S. Blinder
Abstract: An otherwise conventional Keynesian macro model is modified to include inventories of final goods by (1) drawing a distinction between production and final sales, and (2) allowing for a negative effect of the level of inventories on production. Two models are presented: one in which the labor market clears and one in which it does not. Both models are stable only if the negative effect of inventories on production is "large enough." Both models also imply that real wages move counter cyclically -- in direct contrast to the usual implication of Keynesian models. Detailed analysis of the market-clearing model show that there should be negative correlation between the levels of inventories and output, and between changes in inventories and changes in output, over the business cycle. However, inventory change should be positively correlated with the level of output.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inventory levels (D25) | Production outcomes (E23) |
| Changes in inventories (D25) | Changes in output (E23) |
| Inventory levels (D25) | Production levels (E23) |
| Changes in inventories (D25) | Labor demand (J23) |
| Labor demand (J23) | Real wages (J31) |
| Labor demand (J23) | Production outcomes (E23) |