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  4. October 2011
  5. Input and Output Inventory Dynamics

Input and Output Inventory Dynamics

  • Yi Wen
American Economic Journal: Macroeconomics
vol. 3, no. 4, October 2011
(pp. 181-212)
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Abstract

This paper develops an analytically tractable general equilibrium model of inventory dynamics based on a precautionary stockout-avoidance motive. The model's predictions are broadly consistent with the US business cycle and key features of inventory behavior. It is also shown that technological improvement of inventory management can increase, rather than decrease, the volatility of aggregate output. Key to this seemingly counterintuitive result is that a stockout-avoidance motive leads to a procyclical shadow value of inventories, which acts as an automatic stabilizer that discourages sales in booms and encourages demand in recessions, thereby reducing the variability of GDP. (JEL D92, E22, E23, E32, G31)

Citation

Wen, Yi. 2011. "Input and Output Inventory Dynamics." American Economic Journal: Macroeconomics, 3 (4): 181-212. DOI: 10.1257/mac.3.4.181

Additional Materials

JEL Classification

  • D25 Intertemporal Firm Choice, Investment, Capacity, and Financing
  • E22 Capital; Investment; Capacity
  • E23 Macroeconomics: Production
  • E32 Business Fluctuations; Cycles
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
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