Working Paper: NBER ID: w10652
Authors: Aubhik Khan; Julia K. Thomas
Abstract: We search for useful models of aggregate fluctuations with inventories. We focus exclusively on dynamic stochastic general equilibrium models that endogenously give rise to inventory investment and evaluate two leading candidates: the (S,s) model and the stockout avoidance model. Each model is examined under both technology shocks and preference shocks, and its performance gauged by its ability to explain the observed magnitude of inventories in the U.S. economy, alongside other empirical regularities such as the procyclicality of inventory investment and its positive correlation with sales. We find that the (S,s) model is far more consistent with the behavior of aggregate inventories in the postwar U.S. when aggregate fluctuations arise from technology, rather than preference, shocks. The converse is true for the stockout avoidance model. Overall, while the (S,s) model performs well with respect to the inventory facts and other business cycle regularities, the stockout avoidance model does not. There, the essential motive for stocks is insufficient to generate inventory holdings near the data without destroying the model's performance along other important margins. Finally, the stockout avoidance model appears incapable of sustaining inventories alongside capital. This suggests a fundamental problem in using reduced-form inventory models with stocks rationalized by this motive.
Keywords: No keywords provided
JEL Codes: E2; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| technology shocks (D89) | procyclical inventory investment (E22) |
| technology shocks (D89) | positive correlation with sales (C29) |
| ss model (Y60) | captures procyclicality of inventory investment (E22) |
| ss model (Y60) | matches inventory facts under technology shocks (E17) |
| preference shocks (D11) | countercyclical inventory investment (E22) |
| preference shocks (D11) | negative correlation with sales (C29) |
| ss model (Y60) | increased inventory investment under technology shocks (E22) |
| stockout avoidance model (C69) | fails to generate sufficient inventory holdings under preference shocks (D52) |
| idiosyncratic risk (D81) | mitigates stockout avoidance model's shortcomings (C69) |