The Sources of Fluctuations in Aggregate Inventories and GNP

A simple real linear-quadratic inventory model is used to determine how cost and demand shocks interacted to cause fluctuations in aggregate GNP and inventories in the U.S., 1947-1986. Cost shocks appear to be the predominant source of fluctuations in inventories, and are largely responsible for the well known fact that GNP is more variable than final sales. Cost and demand shocks are of roughly equal importance for GNP. These estimates are, however, imprecise. With a different, but plausible, value for a certain target inventory-sales ratio, cost shocks are less important than demand shocks for GNP fluctuations.