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EXPLAINING INVENTORIES: A BUSINESS CYCLE ASSESSMENT OF THE STOCKOUT AVOIDANCE AND (S,s) MOTIVES

Published online by Cambridge University Press:  05 July 2007

AUBHIK KHAN  and
JULIA K. THOMAS
AUBHIK KHAN
Affiliation:
Federal Reserve Bank of Philadelphia
JULIA K. THOMAS
Affiliation:
Federal Reserve Bank of Philadelphia and NBER
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Abstract

We evaluate two leading explanations for inventories, the (S,s) and stockout avoidance motives, examining each within dynamic stochastic general equilibrium environments. We find that the (S,s) model is far more consistent with the cyclical behavior of aggregate inventories in the postwar United States when fluctuations arise from technology shocks, rather than preference shocks, whereas the converse is true for the stockout avoidance model. The (S,s) model succeeds in explaining the average magnitude of inventories in the U.S. economy and in reproducing the cyclical regularities involving inventories and other aggregate series. The stockout avoidance model does not. Even with idiosyncratic risk added to strengthen it, the stockout avoidance motive is insufficient to generate stocks near the data without destroying model performance along other important margins. Moreover, it appears incapable of sustaining inventories alongside capital. These findings suggest a fundamental flaw in reduced-form inventory models where stocks are loosely rationalized by this motive.

Keywords

Inventory Investment(S,s) PoliciesBuffer-Stock MotiveTechnology ShocksPreference Shocks
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 5 , November 2007 , pp. 638 - 664
Copyright
© 2007 Cambridge University Press

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