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American Economic Journal: Macroeconomics: Vol. 3 No. 4 (October 2011)

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Input and Output Inventory Dynamics

Article Citation

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

DOI: 10.1257/mac.3.4.181

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)

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Authors

Wen, Yi (Federal Reserve Bank of St Louis and Tsinghua U)

JEL Classifications

D92: Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
E22: Capital; Investment; Capacity
E23: Macroeconomics: Production
E32: Business Fluctuations; Cycles
G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity

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American Economic Journal: Macroeconomics


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