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ISIR sessions at ASSA meetings

Each year ISIR sponsors a session at the ASSA (Allied Social Sciences Associations) Meetings in January in the USA. Historically, these sessions had focused exclusively on the topic of inventories.  From this year’s session, however, the focus have been expanded to include the related topics of business fixed investment and business cycles.

The International Society for Inventory Research will have a session at the ASSA meetings in Philadelphia. It will take place on Friday, January 5, 2018, 10:15am-12:15pm, at the Loews Philadelphia, Parlor 2. The session was organized by Felipe Schwartzman of the Richmond Fed and Thomas Winberry of the University of Chicago.

For more information (including abstracts of the papers), please go to https://www.aeaweb.org/conference/2018/preliminary/1943.

Short and Long Run Uncertainty

Jose Maria Barrero, Stanford University

Nicholas Bloom, Stanford University

Ian Wright, Goldman Sachs

Small and Large Firms Over the Business Cycle

Nicolas Crouzet, Northwestern University

Neil Mehrotra, Brown University

Regional Heterogeneity and Monetary Policy

Joseph Vavra, University of Chicago

Kinky Tax Policy and Abnormal Investment Behavior

Eric Zwick, University of Chicago

Qiping Xu, University of Notre Dame


Ruediger Bachmann, University of Notre Dame

Francisco Buera, Washington University-St. Louis

Kurt Mitman, Stockholm University

Thomas Winberry, University of Chicago

The International Society for Inventory Research will have a session at the ASSA meetings in Chicago. It will take place on Saturday, January 7, 2017, 8am-10am, at the Sheraton Grand Chicago, Jackson Park. The session was organized by Felipe Schwartzman of the Richmond Fed.

For more information (including abstracts of the papers), please go to https://www.aeaweb.org/conference/2017/preliminary/1796.

Aggregate Shocks and Investment Dynamics: A Granular View

Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity
Aubhik Khan, Ohio State University
Julia K. Thomas, Ohio State University
Tatsuro Senga, Ohio State University

The Role of Firm Heterogeneity and Financial Frictions in Monetary Transmission
Thomas Winberry, University of Chicago
Pablo Ottonello, University of Michigan
Short-Term Shocks and Long-Term Investment
Stephen J. Terry, Boston University
Itay Saporta-Eksten, Tel Aviv University

Globalization Boom and Bust: A Study of United States Automobile Exports from 1913 to 1940
Mario Crucini, Vanderbilt University
Dong Cheng, Vanderbilt University
Hyunseung Oh, Vanderbilt University
Hakan Yilmazkuday, Vanderbilt University

Juliana Salomao, University of Minnesota
Felipe Schwartzman, Federal Reserve Bank of Richmond
Robert Chirinko, University of Illinois-Chicago
Zhu Wang, Federal Reserve Bank of Richmond

James Kahn
Economics Section Head
International Society for Inventory Research

The International Society for Inventory Research (ISIR) sponsors a session each year at the ASSA meetings.  The 2016 meetings will be held in San Francisco, California on January 3-January 5. This year the session is being organized by Hyunseung Oh of Vanderbilt University.

The ISIR encompasses research not just on inventories but also on related areas such as plant and equipment investment, or inventory-theoretic approaches to other areas of economics, including money and liquidity.   Because your research has overlapped with these areas, we hope you will be interested in participating in the ISIR session next January.  If you have (or expect to have) a paper that would be suitable for the session, please send an abstract or a draft of the paper by May 29, 2015 to Hyunseung Oh at hyunseungoh@gmail.com.  


Summary of ISIR session at the January 2015 ASSA meetings

/Boston, Massachusetts on January 3-January 5./
The session is scheduled for Sunday, Jan 04, 2015 2:30 pm, at the Boston Marriott Copley, Yarmouth Room. 

James Kahn

Economics Section Head

The ISIR’s session at the 2015 meetings in Boston, organized by Thomas Lubik (Federal Reserve Bank of

Richmond), and entitled “Inventories and Business Cycles,” was one of the most successful in recent

years. There were over 30 participants and attendees in the room, and the papers generated

considerable interest. Below are abstracts of the papers and brief summaries of the discussants’



Rudiger Bachmann (Notre Dame University) and Peter Zorn (University of Frankfurt):

“The Nature of Capital Expenditures and the Business Cycle”

Using confidential micro data from the IFO investment survey in the German manufacturing industry, we

document the cross‐sectional and business cycle properties of various types of investment. National

accounting data and balance sheet‐based micro data typically only document overall investment at the

firm‐ or plant‐level. The IFO investment survey is unique in that it asks decision makers at firms also

about the nature of investment that they undertook: capacity‐enhancing, restructuring, rationalization,

and maintenance. Our preliminary results are as follows: In the cross‐section, we find that capacityenhancing

and restructuring investments display much lumpier patterns (as measured by the canonical

statistics in Doms and Donne, 1998) than the other investment types. In terms of cyclicality, we find that

all investment types are procyclical, including restructuring and rationalization investments, but to a

different degree. Taken together, this means that the degree of lumpiness in total investment may itself

be time‐varying. Our stylized facts will inform disaggregate dynamic and quantitative models of

investment behavior.

The discussant, Thomas A. Lubik (FRB Richmond), felt that the results were not “surprising,” though

other participants noted that they did suggest confirmation of differences in adjustment technologies

between structures and equipment. Lubik also urged the authors to organize their work around a


Christoph Goertz (University of Birmingham), Afrasiab Mirzayand (University of Birmingham), and John

Tsoukalas (University of Glasgow):

“Investment and Inventories: Evidence on Interactions”

The relative volatility of production and sales has been one of the most important stylized inventory

facts. We show that adding lumpy capital in a model of production‐to‐inventory with both a stock‐out

avoidance and production smoothing motives, replicates this important stylized fact without

compromising the model’s performance in other dimensions. We present evidence from firm level

COMPUSTAT data supporting an interaction between fixed and inventory investment: inventories move

in a lumpy fashion around the time when firms invest heavily in capital, resulting in production


The discussant, Scott Schuh (FRB Boston), liked the approach of modeling inventory and capital

investment decisions jointly, but had some concerns both about how the joint decision was modeled in

the paper, as well as about the quality of the data, including the aggregation level of the inventory data

and the non‐representativeness of the Compustat firms.

Thomas A. Lubik, Pierre‐Daniel Sarte, and Felipe Schwartzman (all FRB Richmond):

“What Inventory Behavior Tells Us About How Business Cycles Have Changed”

Beginning in the mid‐1980s, the nature of U.S. business cycles changed in important ways, as made

evident by distinctive shifts in the comovement and relative volatilities of key economic aggregates.

These include labor productivity, hours, output, and inventories. Unlike the widely documented change

in absolute volatility over that period, known as the Great Moderation, these shifts in comovement and

relative volatilities persist into the Great Recession. To understand these changes, we exploit the fact

that inventory data are informative about sources of business cycles. Specifically, they provide

additional information relative to aggregate investment regarding firms’ intertemporal decisions. In this

paper, we show that the “investment wedge” estimated with inventories, unlike previous measures,

correlates well with established independent measures of credit market frictions. Furthermore, contrary

to previous findings, our generalized investment wedge informed by inventory behavior plays a key role

in explaining the shifts in U.S. business cycles observed after the mid‐1980s.

The discussant, Andrea Tambalotti (FRB New York), found the paper interesting, but wondered about

identification, and why “wedges” were the focus of the paper rather than structural shocks. Other

participants raised the question of why the investment wedge would suddenly become more prominent

just when the technology wedge had receded in its contribution to volatility.

Ana Herrera (University of Kentucky), Yong‐Gook Jung (Wayne State University), and Robert J. Rossana

(Wayne State University):

“Just‐In‐Time Inventories, Business Cycles, and the Great Moderation”

Inventories have historically been assigned two roles in models of the business cycle. Early work on

inventories concluded that inventories were a source of economic fluctuations that would not otherwise

exist. A second view emerged subsequently which is that inventories are not a source of economic

instability but merely are one of the propagation mechanisms for cyclical impulses. Most recently, a

third possibility has arisen which is that inventories are a stabilizing force in aggregate economies,

moderating business cycles that are caused elsewhere in the economy. We construct a dynamic

stochastic general equilibrium (DSGE) model of an economy where firms produce finished goods for sale

to households while holding inventories of finished goods and materials used in the production of

finished goods. Our model of the stock‐producing firm uses standard building blocks found in the

inventory investment literature. Our analysis of the finished goods–producing firm reveals the possibility

of oscillations in state variables (inventories of finished goods and materials) as long‐run equilibrium is

approached by the stock‐producing firm. We parameterize the functional forms in our model and find

parameter values that do indeed result in oscillations in output and other magnitudes in response to a

shock to household preferences. Given these parameter values, we then show that, if inventories of

materials are held by materials producers rather than finished goods producers, business cycles in

response to a preference shock disappear (i.e., there are no longer any oscillations in finished goods and

materials inventories), thereby providing a theoretical justification for the view in the literature that the

adoption of just‐in‐time inventories may have moderated the response in economic activity to shocks.

The discussant, Eric Sims (Notre Dame University) found the approach interesting but noted that the

oscillations produced by the model in the baseline case did not look much like business cycles.

The International Society for Inventory Research (ISIR) sponsors a session each year at the ASSA meetings.  The 2014 meetings will be held in Philadelphia, Pennsylvania on January 3-January 5. This year the session is being organized by George Alessandria of the Federal Reserve Bank of Philadelphia.
The ISIR encompasses research not just on inventories but also on related areas such as plant and equipment investment, or inventory-theoretic approaches to other areas of economics, including money and liquidity.   Because your research has overlapped with these areas, we hope you will be interested in participating in the ISIR session next January.  If you have (or expect to have) a paper that would be suitable for the session, please send an abstract or a draft of the paper by
May 24, 2013 to George at george.alessandria@phil.frb.org.Electronic submission is preferred, but you may also send a hard copy to
George Alessandria
Research Department
Federal Reserve Bank of Philadelphia
Ten Independence Mall
Philadelphia, PA 19106-1574
James Kahn
Economics Section Head

International Society for Inventory Research

Trade, Inventories, and the International Propagation of Business Cycles

George Alessandria, Joseph Kaboski, Virgiliu Midrigan


The large, persistent fluctuations in international trade that cannot be explained in standard models by changes in either expenditures or relative prices are often attributed to trade wedges. We show that these trade wedges can reflect the decisions of importers to change their overseas inventory holdings. We ?find that a two-country model of international business cycles with an inventory management decision can generate trade ?flows and wedges consistent with the data. Moreover, modeling trade in this way alters the international transmission of business cycles. Specifically, real net exports become less procyclical, and consumption becomes consequently less correlated across countries.

Discussant: Jing Zhang, University of Michigan

The Role of Inventories and Capacity Utilization as Shock Absorbers

Leonardo Auernheimer, Danilo R. Trupkin

This paper examines the role of inventories and capacity utilization (of both capital and labor) and, in particular, the relationship among them in the context of a dynamic stochastic general equilibrium framework. The analysis is centered on the effects of two possible shocks: preference (demand) shocks and technology shocks. Impulse-response experiments show that inventories and the rate of capital utilization are mostly complements, while inventories and the rate of labor utilization are mostly substitutes. Moreover, low-persistence shocks emphasize the role of inventories as being a “shock absorber,” whereas high-persistence shocks emphasize the role of inventories as being a complement to consumption. Consistent with the stylized facts in the literature, our calibrated model shows that inventory holdings are procyclical, while the inventory-to-sales ratio is countercyclical. Our model can also explain the observed cyclical comovement between inventories and capital utilization. An additional “theme” regarding the treatment of uncertainty is explored: by approximating the decision rules to a second order, we observe that higher exogenous uncertainty enhances the importance of the precautionary motive to holding inventories.

Discussant: Michael Mahon, University of Warwick

Sales, Inventories, and Real Interest Rates: A Century of Stylized Facts

Luca Benati, Thomas A. Lubik

We use Bayesian time-varying parameters structural VARs with stochastic volatility to investigate changes in both the reduced-form and the structural correlations between business inventories and either sales growth or the real interest rate in the United States during both the interwar and the post-WWII periods. We identify four structural shocks by combining a single long-run restriction to identify a permanent output shock as in Blanchard and Quah (1989), with three sign restrictions to identify demand- and supply-side transitory shocks. We produce several new stylized facts which should inform the development of new models of inventories. In particular, we show that (i ) during both the interwar and the post-WWII periods, the structural correlation between inventories and the real interest rate conditional on identified interest rate shocks is systematically positive; (ii ) the reduced-form correlation between the two series is positive during the post-WWII period, but in line with the predictions of theory it is robustly negative during the interwar era; and (iii ) during the interwar era, the correlations between inventories and either of the two other series exhibits a remarkably strong co-movement with output at the business-cycle frequencies.

Discussant: Eric Sims, University of Notre Dame

Nonlinearities in Aggregate Import Dynamics

Ruediger Bachmann, Andrei Levchenko, Lin Ma

U.S. aggregate imports exhibit strong conditional heteroscedasticity. Over the 1970-2007 period, a simple reduced-form time series model of the import-over-GDP ratio estimates that the 95th percentile of the innovations is twice as large as the 5th percentile. This feature of data can be explained by a trade model where the importing firms face non-convex trade costs, hold inventories of imported goods and thus exhibit microeconomic lumpiness in their trade decisions. We argue that the lumpy adjustments at the firm level can generate state-dependent impulse responses of U.S. aggregate imports.

Discussant: TBD

The ISIR session at the ASSA meetings in Chicago, Illinois took place on January 7, 2012, and was entitled ?Inventories and Business Cycles.?  Presiding was James A. Kahn of Yeshiva University (who also organized the session).  The following papers were presented at the session:

?The Response of Capital Goods Shipments to Demand over the Business Cycle: A Stylized Fact and Some Potential Explanations? by Jeremy Nalewaik and Eugenio Pinto (Federal Reserve Board)

This paper studies the behavior of producers of capital goods, examining how they set shipments in response to fluctuations in new orders. The paper establishes a stylized fact: the response of shipments to orders is more pronounced when the level of orders is low relative to the level of shipments, which typically occurs when orders plunge in recessions. This cyclical change in firm behavior is quantitatively important, accounting for a large portion of the steep decline in equipment investment in the last two recessions. We provide economic interpretations of this stylized fact using models where the production decisions of firms are guided by a target ratio of unfilled orders to shipments. We show that cyclical variation in that target may help explain some of the changes in firm behavior, and using a production smoothing model, we show that time variation in the persistence of the orders growth process is probably a large part of the story as well. Finally, we examine whether an (S, s) adjustment model can help explain our empirical results.

Discussant: Jon Willis (Federal Reserve Bank of Kansas City)

?Lumpy Investment, Lumpy Inventories? by Rudiger Bachmann and Lin Ma (University of Michigan)

We reevaluate the claim in Khan and Thomas (2008) that fixed capital adjustment costs are irrelevant for aggregate dynamics. We augment a standard lumpy investment model with non-convex adjustment costs for fixed capital to include another channel of consumption smoothing: inventories. This extra channel of saving breaks the tight link between consumption and fixed investment. We find that when capital investment is no longer the mirror image of consumption, volatility and persistence of aggregate variables change with the fixed capital adjustment costs in the expected direction: investment volatility is dampened and persistence increased.

Discussant: Francois Gourio (Boston University)

?When Do Inventories Destabilize the Economy? A Tractable Approach to (S,s) Policies? by Pengfei Wang (Hong Kong Science and Technology University), Yi Wen (FRB St. Louis), and Zhiwei Xu (Tsinghua Univ)

Conventional wisdom has it that inventory investment destabilizes the economy because it is procyclical to sales. Khan and Thomas (2007) show that the conventional wisdom is wrong in a general equilibrium (S,s) model with capital. We argue that their finding is not robust?the conventional wisdom can still hold in general equilibrium if firms can adjust output by varying the capacity utilization rate. Our result also holds true if there exist investment adjustment costs. Unlike the existing (S,s) inventory literature that relies on the Krusell-Smith (1998) numerical solution methods, we characterize (S,s) inventory policies in closed form despite the large state space in our general equilibrium model. Standard log-linearization methods can be used to solve the model and generate impulse response functions.

Discussant: Daniele Coen-Pirani (University of Pittsburgh)

?Durable Goods Production and Inventory Dynamics: An Application to the Automobile Industry? by Adam Copeland (Federal Reserve Bank of New York) and James A. Kahn (Yeshiva University)

This paper develops a model of the joint determination of production, inventories and pricing of a monopolistically competitive durable good producer. The model gives rise to time-varying markups that interact with the inventory-sales ratio, even with flexible prices. Maximum likelihood estimation with automobile industry data yields plausible parameter estimates and impulse responses. We then apply the model to analyze the impact of the ?Cash-for-Clunkers? program, and find that the model predicts a negligible production response; essentially all the action is inventories. This leads us to consider evidence of threshold effects that imply a stronger response very far from the steady state. This results in a modest but more plausible production response to the policy–still small in comparison to the sales impact, but now at least measurable. Even with some production response, the results still provide a cautionary tale for countercyclical policies that rely on stimulating consumer spending. Even an impact on spending need not translate into a comparable impact on employment and output.

Discussant: Pierre-Daniel Sarte (Federal Reserve Bank of Richmond)


Denver, January 2011

Presentation (15 minutes each)

Discussion (10 minutes each)

1)?A Unified Solution to Inventory Puzzles,? by Louis J. Maccini, Bartholomew Moore, and Huntley Schaller

Discussant: James Kahn

Abstract: There are two important sets of puzzles about inventories. The first set might be called the “traditional puzzles.” First, there is the variance ratio puzzle. If production costs are convex, then firms want to smooth production in response to demand shocks. This implies that production should vary less than sales. It doesn’t. Second, there is the slow adjustment puzzle. As an influential survey of the inventory literature puts it, “One major difficulty with stock-adjustment models is that adjustment speeds generally turn out to be extremely low; the estimated adjustment speed is often less than 10 percent per month. This is implausible when even the widest swings in inventory stocks amount to no more than a few days of production. [Blinder and Maccini (1991, page 81)]” Finally, there is the input cost puzzle. When costs are low, firms have an incentive to produce more and build up their inventories. It has been surprisingly difficult, however, to find evidence of an empirical relationship between observable costs and inventories. The second set of puzzles arises out of the relationship between monetary policy and inventories. First, the mechanism puzzle. Monetary policy changes the interest rate and should affect inventories, since the interest rate represents the opportunity cost of holding inventories. In fact, VAR studies find that monetary policy affects inventories. But 40 years of empirical research on inventories has generally failed to find any significant effect of the interest rate on inventories. Second, the sign puzzle. Expansionary monetary policy lowers the interest rate. A decline in the interest rate should increase inventories, because a lower interest rate reduces the opportunity cost of holding inventories. VAR studies find that the short-term effect of an expansionary monetary policy is just the opposite — inventories decrease. Third, the timing puzzle. Monetary policy induces transitory changes in the interest rate. The effect of monetary policy on the interest rate largely disappears within one year. But inventories begin to fall only after the transitory shock to the interest rate has largely dissipated. In this paper, we use non-stationary econometrics to abstract from the high-frequency noise in the data. We construct a model that incorporates several economic mechanisms but is tractable enough to be linearized around stationary magnitudes. We then calibrate structural parameters using coefficient estimates from the cointegrating regression. Using the resulting structural parameters and the decision rule from the model we analyze and provide a unified explanation for all of these empirical puzzles.

2)?Inventories in Motion: A New Approach to Inventories over the Business Cycle? by Michael McMahon

Discussant: Thomas Lubik (Richmond Fed)

Abstract: I examine those inventories which arise naturally in the gaps between the production of goods and their consumption (distribution inventories) as well as a simple storage motive. Though these are technically difficult to embed in a general equilibrium business cycle model, I overcome these difficulties using a non-linear solution algorithm. Simulating a monthly model, I aggregate the data to a quarterly frequency and find that the inventories model matches the aggregate data well. I then consider whether changes in the management of inventories by firms in the last 25 years, such as the so-called “Walmart Approach”, may have caused the coincident decline in the volatility of GDP growth – the Great Moderation. Mapping the salient features of the improvements in inventory management, such as cheaper and faster distribution of goods, into the parameters of my model, I find little role for improved inventory management in explaining the decline in macroeconomic volatility. While the inventory management changes are useful to match aspects of the changes in inventory behaviour over the last 25 years, I conclude that the “Good Luck” hypothesis, namely, the idea that the decline in macroeconomic volatility is simply related to smaller and/or less frequent macroeconomic shocks, is a much more likely explanation for falling variance of GDP growth.?

3) ?Negative investment in China: restructuring and financing constraints versus growth,? by Sai Ding (University of Glasgow), Alessandra Guariglia (Durham University), John Knight (University of Oxford)

Discussant: Kaiji Chen (Hong Kong University )

Abstract: This paper attempts to address the seemingly puzzle of China?s investment pattern: despite the high aggregate investment, a high rate of negative investment is found at the microeconomic level. Using a large firm-level dataset, we test three hypotheses of negative investment among various ownership groups: the financing explanation, the efficiency explanation, and the growth explanation. Our panel data Probit estimation shows that the negative investment by state-owned firms can be explained mainly by inefficiency: owing to over-investment or mis-investment in the past, these firms need to restructure and get rid of obsolete capital in the face of increasing competition and hardening budgets. The financing explanation holds for private firms, which may have to divest in order to raise capital. Rapid economic growth counterweighs both effects in all types of firms.

4)?Investment, irreversibility, and financing constraints in transition economies,?  by Alessandra Guariglia, John Tsoukalas, and Serafeim Tsoukas

Discussant: George Hall (Brandeis University)

Abstract: Using a panel of 4223 Bulgarian, Czech, Polish, and Romanian firms, over the period 1998-2005, we show that financially constrained firms likely to face irreversibility constraints exhibit low and insignificant sensitivities of investment to cash flow. These firms typically use their cash flow to accumulate cash instead of investing. Our findings provide a new explanation for why some financially constrained firms may exhibit low investment-cash flow sensitivities. Specifically, controlling for investment irreversibility may matter for the interpretation of these sensitivities.

Download the summary of the 2010 ISIR  session.

The International Society for Inventory Research (ISIR) sponsors a session each year at the ASSA Meetings in January.  Historically, these sessions have focused exclusively on the topic of inventories.  At next year?s session, however, the focus will be expanded to include the related topics of business fixed investment and business cycles.

Jan. 3, 2:30 pm, Atlanta Marriott Marquis, M105 – ISIR
Inventories, Investment and Aggregate Fluctuations (E2)
Presiding: AUBHIK KHAN (Ohio State University)
The Cross-section of Firms over the Business Cycle: New Facts and a DSGE Exploration
RUEDIGER BACHMANN (University of Michigan)
CHRISTIAN BAYER (IGIER, Universita Bocconi)
Estimating Firm-Level Risk
FRANCES GOURIO (Boston University)
Input and Output Inventories in the UK
JOHN D. TSOUKALAS (University of Nottingham)
Time-to-Build and the Seasonal Fluctuations
SATYAJIT CHATTERJEE (Federal Reserve Bank of Philadelphia)
B. RAVIKUMAR (University of Iowa)

January 3-5, Atlanta, GA, USA

The International Society for Inventory Research (ISIR) sponsors a session each year at the ASSA Meetings in January. Historically, these sessions have focused exclusively on the topic of inventories.  At next year?s session, however, the focus will be expanded to include the related topics of business fixed investment and business cycles.

Jan. 3, 2:30 pm, Atlanta Marriott Marquis, M105 – ISIR

Inventories, Investment and Aggregate Fluctuations (E2)

Presiding: AUBHIK KHAN (Ohio State University)

The Cross-section of Firms over the Business Cycle: New Facts and a DSGE Exploration

RUEDIGER BACHMANN (University of Michigan)

CHRISTIAN BAYER (IGIER, Universita Bocconi)

Estimating Firm-Level Risk

FRANCES GOURIO (Boston University)

Input and Output Inventories in the UK

JOHN D. TSOUKALAS (University of Nottingham)

Time-to-Build and the Seasonal Fluctuations

SATYAJIT CHATTERJEE (Federal Reserve Bank of Philadelphia)

B. RAVIKUMAR (University of Iowa)

The ISIR session at the ASSA Meetings in San Francisco, CA took place on January 3, 2009 and was entitled “Topics in Inventory Research”. Presiding was Louis J. Maccini of Johns Hopkins University (who also organized the session). The following papers were presented at the the session:

“Input and Output inventory Dynamics”by Yi Wen, Federal Reserve Bank of St. Louis

This paper develops an analytically-tractable general-equilibrium model of inventory dynamics based on a precautionary stockout-avoidance motive. The model?s predictions are broadly consistent with the U.S. business cycle and key features of inventory behavior, including (i) a large inventory stock-to-sales ratio and a small inventory investment-to-sales ratio in the long run, (ii) excess volatility of production relative to sales, (iii) procyclical inventory investment but countercyclical stock-to-sales ratio over the business cycle, and (iv) more volatile input inventories than output inventories. It is also shown that technological improvement of inventory management (that eliminates production/ordering lags) can increase, rather than decrease, the volatility of aggregate output. Key to this seemingly counter-intuitive result is that a stockout- avoidance motive leads to procyclical liquidity-value of inventories (hence, procyclical relative prices of output), which acts as an automatic stabilizer that discourages final sales in a boom and encourages final sales during a recession, thereby reducing the variability of GDP.

Discussant: Scott Schuh, Federal Reserve Bank of Boston

?Inventories, Monetary Policy, and the Market for New Automobiles? by  Adam Copeland, Bureau of Economic Analysis,  George Hall, Brandeis University and Louis Maccini, Johns Hopkins University

This paper investigates the effects of monetary policy on the market for new automobiles. A representative automobile firm is modeled as a dynamic profit-maximizer who is a monopolistic competitor and holds large quantities of inventories in order to facilitate sales.  The model of the firm is used to develop a market-equilibrium model that determines the price and quantity of new cars and light trucks.  Our market-equilibrium model is estimated using quarterly micro-level data on new cars and light trucks.  Monetary policy of course changes interest rates.  Increases in interest rates dampen sales through two channels. First, higher interest rates raise the cost to the firm of holding inventories; as the firm economizes on its inventory holdings, consumer find it more difficult to be matched with their preferred vehicle and fewer sales are consummated. Second, higher interest rates raise the cost to consumers of purchasing a new vehicle on credit.  We find both channels to be quantitatively important.

Discussant: James Kahn, University of Pennsylvania

?Inventories, Lumpy Trade, and Large Devaluations? by George Alessandria, Federal Reserve Bank of Philadelphia,  Joseph Kaboski, Ohio State University, and Virgiliu Midrigan, New York University

Fixed transaction costs and delivery lags are important costs of international trade. These costs lead firms to import infrequently and hold substantially larger inventories of imported goods than domestic goods. Using multiple sources of data, we document these facts. We then show that a parsimoniously parameterized model economy with importers facing an (S, s)-type inventory management problem successfully accounts for these features of the data. Moreover, the model can account for import and import price dynamics in the aftermath of large devaluations. In particular, desired inventory adjustment in response to a sudden, large increase in the relative price of imported goods creates a short-term trade implosion, an immediate, temporary drop in the value and number of distinct varieties imported, as well as a slow increase in the retail price of imported goods. Our study of 6 current account reversals following large devaluation episodes in the last decade provide strong support for the model?s predictions.

Discussant: Aubhik Khan, Ohio State University

The ISIR session entitled ?Recent Advances in Inventory Research? at the ASSA Meetings in New Orleans, LA, took place on Friday, January 4. Andreas Hornstein of the Federal Reserve Bank of Richmond organized the session and presided. The following papers were presented.

?Durable Goods Inventories and the Great Moderation,? by James A. Kahn, Federal Reserve Bank of New York

The so-called ?Great Moderation? was not an across-the-board uniform reduction in volatility, but was heavily concentrated in the durable goods sector. This paper presents evidence of the role of inventories in that sector’s stabilization, and then provides a model that is consistent with the facts in that sector as well as with anecdotal accounts of improved inventory management. The key innovation in the model is to apply the idea of stockout-avoidance to a production-to-order industry, which best characterizes the durable goods sector. The key technological advance is characterized by a reduced lead time on materials orders. Numerical examples suggest that the mechanism of the model is capable of delivering reductions in the volatility of both output and sales that are on the order of magnitude of those observed in the data.

Discussant: Elena Pesavento (Emory University)

?Input-Output Inventories and the Great Moderation,? by Ana Maria Herrera, Michigan State University, Zheng Liu (Emory University), and Elena Pesavento (Emory University)

In recent years, interest in assessing the contribution of inventory behavior to the Great Moderation has spurred a line of inquiry into various empirical features of inventory investment. Despite this broad empirical literature, there is only a limited number of theoretical studies that model inventories in a quantitative dynamic stochastic general equilibrium (DSGE) setting. We build a model in which the production of a final good goes through multiple stages, but in which individuals optimize. In the model, a firm at the first stage uses labor as an input, while a firm at a later stage uses all outputs produced at the previous stage. A representative household consumes a basket of goods produced at the final stage and supplies labor to firms at the first stage. Our model is a dynamic extension of Blanchard and Kiyotaki (1987) featuring monopolistic competition in goods markets and in labor markets, in which imperfectly competitive firms set nominal prices for differentiated goods and imperfectly competitive households set nominal wages for differentiated labor skills. The model has the additional features that a composite of the differentiated goods can serve either as a final consumption good or as an intermediate input for the production of the differentiated goods (Huang and Liu, 2004), and that inventories enter the production function of intermediate and final goods.

The model also includes a monetary authority, which allows us to explore the role of better policy in explaining changes in the business cycle.

Discussant: Scott Schuh, Federal Reserve Bank of Boston

?Oil Shocks, Segment Shifts, and Capacity Utilization in the U.S. Automobile Industry: What has changed in 30 Years,? by Valerie A. Ramey (University of California, San Diego) and Daniel J. Vine (Federal Reserve Board)

Between 2002 and 2006, the average price of gasoline in the United States increased more than two fold after having risen only modestly in the preceding 15 years. Much like the episodes of fuel price escalation in the 197 0s and early 1 980s, the recent increase caused a shift in auto demand away from heavy vehicles towards more fuel efficient models. While the marketplace for new autos and the flexibility of production technology have evolved in many ways since the 1970s, the disruptions to motor vehicle output caused by the most recent sectoral shift were in many ways similar to thedisruptions observed 30 years ago. Using detailed industry data, we show that the misalignment between supply and demand across vehicle market segments was about as large after 2002 as it was in the early 1970s and early 1980s. Capacity utilization declined after each of these episodes, and, controlling for differences in the business cycle in each episode, the magnitude of the decline attributable to the shifts in the composition of demand was about the same. Finally, we find that the adjustments made to production capacity since 2002 were similar to the adjustments made in the 1980s, when shifts in demand were judged as being permanent.

Discussant: George Hall, Brandeis University

International Society for Inventory Research (ISIR) session

at the January 2008 ASSA convention in New Orleans, LA.

Session Title: Recent Advances in Inventory Research

Presiding: Andreas Hornstein, Federal Reserve Bank of Richmond

Paper: “Inventories and the Great Moderation Revisited”

James Kahn (Federal Reserve Bank of New York),

Discussant: Elena Pesavento (Emory University)

Paper: ?Production Chains and the Business Cycles: A Model of Input and Output Inventories?

Ana Maria Herrera (Michigan State University), Zheng Liu (Emory University), Elena Pesavento (Emory University)

Discussant: Scott Schuh, Federal Reserve Bank of Boston

Paper: “Segment Shifts and Capacity Utilization in the U.S. Automobile Industry: What has changed in 30 years?”

Valerie A. Ramey (University of California San Diego) – Daniel J. Vine (Federal Reserve Board),

Discussant: George Hall, Brandeis University

Andreas Hornstein

Research Department

Federal Reserve Bank of Richmond

PO Box 27622

Richmond VA 23261-7622

Phone: (804) 697-8266

Fax: (804) 697-8217, 697-2662

e-mail: andreas.hornstein@rich.frb.org

web page: http://www.richmondfed.org/research/research_economists/andreas_hornstein.cfm

ISIR Session at the Allied Social Science Meetings

In Chicago, IL, January 5-7, 2007

The ISIR session entitled “Recent Advances in Inventory Research? at the ASSA Meetings in Chicago , IL took place Saturday, January 6. George Hall of Brandeis University organized the session and presided. The following papers were presented:

“Inventory Turnover and Product Variety? by Howard P. Marvel and James Peck, The Ohio State University .

This paper studies the powerful incentives retailers face to limit their inventories, leading them to focus on inventory turn as a performance measure. Retailers? desire to pare inventory holding costs yield a misalignment of their incentives with those of a supplier seeking to have a broad line of products held. The authors identify the source of the vertical misalignment, demonstrating its impact on product variety. The authors then consider a series of vertical restraints that can potentially correct the problem and use the analysis to explain the otherwise puzzling behavior of suppliers in several recent U.S. antitrust cases.

Discussant: Adam Copeland, Bureau of Economic Analysis

“Long-Run Inventory Responses to Changes in Interest Rates: A Stage of Fabrication Approach? by David Bivin, Indiana University Purdue University Indianapolis

In this paper, the author examines the relationship between inventories (both finished goods and work-in-progress) and long-run movements of the real interest rate in build-to-order industries. Using data at the 2-digit SIC level, the author finds that in about half the industries studied inventories at all levels of production fall when the economy transitions from a low-interest rate regime to a high-interest rate regime.

Discussant: Huntley Schaller, Carleton University

“Monetary Policy Shocks, Inventory Dynamics, and Price Setting Behavior? by Yongseung Jung, Kyunghee University, and Tack Yun, Board of Governors of the Federal Reserve System.

In this paper, the authors incorporate a productive role for inventories into the new-Keynesian framework for modeling the macroeconomy. First the authors estimate a VAR model demonstrating that an unexpected rise in the Federal Funds rate is associated with a decrease in the ratio of sales-to-stocks as well as an increase in finished good inventories. Second, within an optimizing model with staggered price setting the authors assume holding finished inventories helps firms generate more sales. Using this model, the authors show that they can replicate this observed relationship between monetary shocks and finished good inventories as well as derive a new-Keynesian-style Phillips Curve.

Discussant: Youngsung Chang, Seoul National University

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