The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Inventory Investment

  • James A. Kahn
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2283

Abstract

Interest in inventory investment’s role in business cycle volatility goes back at least to John Maynard Keynes. This article examines some basic facts about aggregate inventory investment, emphasizing its highly volatile and pro-cyclical nature. It then outlines several approaches to modelling inventory behaviour, including a detailed discussion of the linear-quadratic model, and examines their implications for inventory investment’s potential role in business cycle fluctuations. The article concludes with a discussion of the potential for progress in inventory control methods to have played a role in the decline in aggregate volatility since the mid- 1980s.

Keywords

Adjustment costs Business cycles Credit constraints Dynamic programming Flexible accelerator models Inventory behaviour Inventory investment Linear-quadratic models Metzler, L. A. National income accounts Non-convexity s-S models Stockout-avoidance model 

JEL Classifications

D4 D10 
This is a preview of subscription content, log in to check access.

Bibliography

  1. Abramovitz, M. 1950. Inventories and business cycles. New York: National Bureau of Economic Research.Google Scholar
  2. Bils, M.J., and J.A. Kahn. 2000. What inventory behavior tells us about business cycles. American Economic Review 90: 458–481.CrossRefGoogle Scholar
  3. Blanchard, O.J. 1983. The production and inventory behavior of the U.S. automobile industry. Journal of Political Economy 91: 365–400.CrossRefGoogle Scholar
  4. Blinder, A.S. 1981. Retail inventory behavior and business fluctuations. Brookings Papers on Economic Activity 1981(2): 443–505.CrossRefGoogle Scholar
  5. Blinder, A.S. 1986. Can the production smoothing model of inventory behavior be saved? Quarterly Journal of Economics 101: 431–453.CrossRefGoogle Scholar
  6. Caplin, A. 1985. The variability of aggregate demand with (S, s) inventory policies. Econometrica 53: 1395–1410.CrossRefGoogle Scholar
  7. Christiano, L. 1988. Why does inventory investment fluctuate so much? Journal of Monetary Economics 21: 247–280.CrossRefGoogle Scholar
  8. Durlauf, S., and L. Maccini. 1995. Measuring noise in inventory models. Journal of Monetary Economics 36: 65–90.CrossRefGoogle Scholar
  9. Eichenbaum, M. 1989. Some empirical evidence on the production level and production cost smoothing properties of inventory investment. American Economic Review 79: 853–864.Google Scholar
  10. Feldstein, M.S., and A. Auerbach. 1976. Inventory behavior in durable goods manufacturing: The target adjustment model. Brookings Papers on Economic Activity 1976(2): 351–396.CrossRefGoogle Scholar
  11. Hall, G., and J. Rust. 2000. An empirical model of inventory investment by durable commodity intermediaries. Carnegie-Rochester Conference Series on Public Policy 52: 171–214.CrossRefGoogle Scholar
  12. Holt, C.C., F. Modigliani, J.F. Muth, and H. Simon. 1960. Planning production, inventories, and work force. Englewood Cliffs: Prentice-Hall.Google Scholar
  13. Hornstein, A., and J. Fisher. 2000. (S, s) inventory policies in general equilibrium. Review of Economic Studies 67: 117–145.CrossRefGoogle Scholar
  14. Kahn, J.A. 1987. Inventories and the volatility of production. American Economic Review 77: 667–669.Google Scholar
  15. Kahn, J.A. 1992. Why is production more volatile than sales? Theory and evidence on the stockout-avoidance motive for inventory-holding. Quarterly Journal of Economics 107: 481–510.CrossRefGoogle Scholar
  16. Kahn, J.A., M. McConnell, and G. Perez-Quiros. 2002. On the causes of increased stability in the US economy. Economic Policy Review 8: 183–202.Google Scholar
  17. Karlin, S., and C.R. Carr. 1962. Prices and optimal inventory policy. In Studies in Applied Probability and Management Science, ed. K. Arrow, S. Karlin, and H. Scarf. Stanford: Stanford University Press.Google Scholar
  18. Kashyap, A., J. Stein, and D. Wilcox. 1994. Credit conditions and the cyclical behavior of inventories. Quarterly Journal of Economics 109: 565–592.CrossRefGoogle Scholar
  19. Keynes, J.M. 1936. The general theory of employment, interest and money. London/New York: Macmillan/Harcourt Brace.Google Scholar
  20. Kydland, F., and E. Prescott. 1982. Time-to-build and aggregate fluctuations. Econometrica 50: 1345–1370.CrossRefGoogle Scholar
  21. Lovell, M.C. 1961. Manufacturers’ inventories, sales expectations, and the acceleration principle. Econometrica 29: 293–314.CrossRefGoogle Scholar
  22. McConnell, M., and G. Perez-Quiros. 2000. Output fluctuations in the United States: What has changed since the early 1980s? American Economic Review 90: 1464–1576.CrossRefGoogle Scholar
  23. Metzler, L. 1941. The nature and stability of inventory cycles. Review of Economics and Statistics 23: 113–129.CrossRefGoogle Scholar
  24. Ramey, V. 1991. Nonconvex costs and the behavior of inventories. Journal of Political Economy 99: 306–334.CrossRefGoogle Scholar
  25. Ramey, V., and K. West. 1999. Inventories. In The handbook of macroeconomics, ed. J.B. Taylor and M. Woodford. Amsterdam: Elsevier Science.Google Scholar
  26. Scarf, H. 1960. The optimality of (S, s) policies in the dynamic inventory problem. In Mathematical methods in the social sciences, ed. K. Arrow, S. Karlin, and H. Scarf. Stanford: Stanford University Press.Google Scholar
  27. US National Income and Product Accounts. 2007. Online. Available at http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp. Accessed 23 Feb 2007.
  28. West, K.D. 1986. A variance bounds test of the linear quadratic inventory model. Journal of Political Economy 94: 374–401.CrossRefGoogle Scholar
  29. West, K.D. 1990. The sources of fluctuations in aggregate inventories and GNP. Quarterly Journal of Economics 105: 939–972.CrossRefGoogle Scholar
  30. West, K.D., and D. Wilcox. 1994. Estimation and inference in the linear-quadratic inventory model. Journal of Economic Dynamics and Control 18: 897–908.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • James A. Kahn
    • 1
  1. 1.