TY  - JOUR
AU  - Bils,Mark
AU  - Kahn,James A.
TI  - What Inventory Behavior Tells Us About Business Cycles
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7310
PY  - 1999
Y2  - August 1999
UR  - http://www.nber.org/papers/w7310
L1  - http://www.nber.org/papers/w7310.pdf
N1  - Author contact info:
Mark Bils
Department of Economics
University of Rochester
Rochester, NY 14627
Tel: 585/275-0488
Fax: 585/256-2309
E-Mail: bils@troi.cc.rochester.edu

James Kahn
Economics Department
Yeshiva University
Belfer Hall, 5th Floor
500 W. 185th St
New York, NY 10033
Tel: 212-960-5400 x6964
Fax: 212-960-0846
E-Mail: jkahn1@yu.edu
AB  - Manufacturers' finished goods inventories move less than shipments over the business cycle. We argue that this requires marginal cost to be more procyclical than is conventionally measured. We construct, for six manufacturing industries, alternative measures of marginal cost that attribute high-frequency productivity shocks to procyclical work effort, and find that they are much more successful in accounting for inventory behavior. The difference is attributable to cyclicality in the shadow price of labor, not to diminishing returns in fact, parametric evidence suggests that the short-run slope of marginal cost is close to zero for five of the six industries. Moreover, while our measures of marginal cost are procyclical relative to output price, they are too persistent for intertemporal substitution to be important. We conclude that countercyclical markups are chiefly responsible for the sluggish response of inventory stocks over the cycle.
ER  -