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Inventory investment and the business cycle: the usual suspect

Inventory investment and the business cycle: the usual suspect Abstract From quarterly postwar US and French data, this paper provides evidence of a bounce-back effect in inventory investment but not in final sales data. Actually, from a bounce-back augmented threshold model, it appears that i) the null hypothesis of no bounce-back effect is strongly rejected by the inventory investment data and ii) the one-step ahead forecasting performances of the models accounting for this bounce-back effect are well improved compared to linear or standard threshold autoregressions. This supports the conventional wisdom that inventory investment exacerbates aggregate fluctuations, in line with the recent theoretical models by, e.g., Wang and Wen (Wang, P., and Y. Wen. 2009. “Inventory Accelerator in General Equilibrium.” Working Paper 010, Federal Reserve Bank of St. Louis) and Wang, Wen and Xu (Wang, P., Y. Wen, and Z. Xu. 2011. “When do Inventories Destabilize the Economy? An Analytical Approach to (s,s) Policies.” Working Paper 014, Federal Reserve Bank of St. Louis) which clearly predict a destabilizing role of inventory investment over the business cycle. By contrast, our empirical findings cast doubt on models based on the stockouts avoidance motive for holding inventories. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Nonlinear Dynamics & Econometrics de Gruyter

Inventory investment and the business cycle: the usual suspect

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Publisher
de Gruyter
Copyright
Copyright © 2013 by the
ISSN
1081-1826
eISSN
1558-3708
DOI
10.1515/snde-2012-0041
Publisher site
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Abstract

Abstract From quarterly postwar US and French data, this paper provides evidence of a bounce-back effect in inventory investment but not in final sales data. Actually, from a bounce-back augmented threshold model, it appears that i) the null hypothesis of no bounce-back effect is strongly rejected by the inventory investment data and ii) the one-step ahead forecasting performances of the models accounting for this bounce-back effect are well improved compared to linear or standard threshold autoregressions. This supports the conventional wisdom that inventory investment exacerbates aggregate fluctuations, in line with the recent theoretical models by, e.g., Wang and Wen (Wang, P., and Y. Wen. 2009. “Inventory Accelerator in General Equilibrium.” Working Paper 010, Federal Reserve Bank of St. Louis) and Wang, Wen and Xu (Wang, P., Y. Wen, and Z. Xu. 2011. “When do Inventories Destabilize the Economy? An Analytical Approach to (s,s) Policies.” Working Paper 014, Federal Reserve Bank of St. Louis) which clearly predict a destabilizing role of inventory investment over the business cycle. By contrast, our empirical findings cast doubt on models based on the stockouts avoidance motive for holding inventories.

Journal

Studies in Nonlinear Dynamics & Econometrics – de Gruyter

Published: May 1, 2013

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    Inoue
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    Kim
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