TY  - JOUR
AU  - Khan,Aubhik
AU  - Thomas,Julia
TI  - Inventories and the Business Cycle: An Equilibrium Analysis of (S,s) Policies
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10078
PY  - 2003
Y2  - November 2003
UR  - http://www.nber.org/papers/w10078
L1  - http://www.nber.org/papers/w10078.pdf
N1  - Author contact info:
Aubhik Khan
Department of Economics
Ohio State University
410 Arps Hall
1945 N. High Street
Columbus, OH 43210
Tel: 614 247 0097 
E-Mail: mail@aubhik-khan.net

Julia Thomas
Department of Economics
The Ohio State University
410 Arps Hall
1945 N High Street
Columbus, OH 43210
E-Mail: mail@juliathomas.net
AB  - We develop an equilibrium business cycle model where nonconvex delivery costs lead producers of final goods to follow generalized (S,s) inventory policies with respect to intermediate goods. When calibrated to match the average inventory-to-sales ratio in postwar U.S. data, our model reproduces two-thirds of the cyclical variability of inventory investment. Moreover, inventory accumulation is strongly procyclical, and production is more volatile than sales, as in the data. The comovement between inventory investment and final sales is often interpreted as evidence that inventories amplify aggregate fluctuations. Our model contradicts this view. Despite the positive correlation between sales and inventory investment, we find that inventory accumulation has minimal consequence for the cyclical variability of GDP. In equilibrium, procyclical inventory investment diverts resources from the production of final goods; thus, it dampens cyclical changes in final sales, leaving GDP volatility essentially unaltered. Moreover, although business cycles arise solely from shocks to productivity and markets are perfectly competitive in our model, it nonetheless yields a countercyclical inventory-to-sales ratio.
ER  -