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
JEL ClassificationsD4 D10
- Abramovitz, M. 1950. Inventories and business cycles. New York: National Bureau of Economic Research.Google Scholar
- 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
- Holt, C.C., F. Modigliani, J.F. Muth, and H. Simon. 1960. Planning production, inventories, and work force. Englewood Cliffs: Prentice-Hall.Google Scholar
- Kahn, J.A. 1987. Inventories and the volatility of production. American Economic Review 77: 667–669.Google Scholar
- 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
- 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
- Keynes, J.M. 1936. The general theory of employment, interest and money. London/New York: Macmillan/Harcourt Brace.Google Scholar
- Ramey, V., and K. West. 1999. Inventories. In The handbook of macroeconomics, ed. J.B. Taylor and M. Woodford. Amsterdam: Elsevier Science.Google Scholar
- 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
- US National Income and Product Accounts. 2007. Online. Available at http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp. Accessed 23 Feb 2007.