TY - JOUR AU - Cecchetti,Stephen G. AU - Kashyap,Anil K AU - Wilcox,David W. TI - Do Firms Smooth the Seasonal in Production in a Boom? Theory and Evidence JF - National Bureau of Economic Research Working Paper Series VL - No. 5011 PY - 1995 Y2 - February 1995 UR - http://www.nber.org/papers/w5011 L1 - http://www.nber.org/papers/w5011.pdf N1 - Author contact info: Stephen G. Cecchetti Monetary and Economic Department Bank for International Settlements Centralbahnplatz 2 4002 Basel SWITZERLAND Tel: +41 61 280 8350 Fax: +41 61 280 9113 E-Mail: stephen.cecchetti@bis.org Anil Kashyap Booth School of Business University of Chicago 5807 S. Woodlawn Avenue Chicago, IL 60637 Tel: 773/702-7260 Fax: 773/702-0458 E-Mail: anil.kashyap@chicagobooth.edu David Wilcox Federal Reserve Board 20th and Constitution Avenue, NW Washington, DC 20551 Tel: 202/452-2991 Fax: 202/452-5296 E-Mail: david.w.wilcox@frb.gov AB - Using disaggregated production data we show that the size of seasonal cycles changes significantly over the course of the business cycle. In particular, during periods of high economy-wide activity, some industries smooth seasonal fluctuations while others exaggerate them. We interpret this finding using a simple analytical model that describes the conditions under which seasonal and cyclical fluctuations can be separated. Our model implies that seasonal fluctuations can safely be disentangled from cyclical fluctuations only when the marginal cost of production is linear, and the variation in demand and cost satisfy certain (restrictive) conditions. The model also suggests that inventory movements can be used to isolate the role of demand shifts in generating any interaction between seasonal cycles and business cycles. Thus, the empirical analysis involves studying the variation in seasonally unadjusted patterns of production and inventory accumulation over different phases of the business cycle. Our finding that seasonals shrink during booms and that firms carry more inventories into high sales seasons during a boom leads us to conclude that for several industries, marginal cost slopes up at an increasing rate. Conversely, in a couple of industries we find that seasonal swings in production are exaggerated during booms and that inventories are drawn down prior to high sales seasons, suggesting that marginal costs curves flatten as production increases. Overall, we find considerable evidence that there are non-linear interactions between business cycles and seasonal cycles. ER -