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.
KeywordsAdjustment 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
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