Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/50605
Authors: 
Shibayama, Katsuyuki
Year of Publication: 
2010
Series/Report no.: 
School of Economics discussion papers 10,05
Abstract: 
This article investigates a dynamic general equilibrium model with a stockout constraint, which means that no seller can sell more than the inventories that she has. The model successfully explains two inventory facts; (i) inventory investment is procyclical, and (ii) production is more volatile than sales. The key intuition is that, since inventories and demand are complements in generating sales, the optimal level of inventories is increasing in expected demand. Thus, when demand is expected to be strong, firms increase their production not only to meet their demand but also to accumulate inventories. Also, our model shows that the inventory to sales ratio is persistent and countercyclical, while the (endogenous) markup is countercyclical. These are because a high interest rate in booms discourages firms to hold inventories.
Subjects: 
inventory investment
inventory cycles
stockout constraint
dynamic stochastic general equilibrium model
JEL: 
E32
C68
Document Type: 
Working Paper

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