What inventories tell us about aggregate fluctuations—A tractable approach to (S,s) policies |
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| Institution: | 1. Department of Economics, Hong Kong University of Science and Technology, Hong Kong, China;2. Federal Reserve Bank of St. Louis, United States;3. Tsinghua University, China;4. Antai College of Economics and Management, Shanghai Jiao Tong University, China;1. Department of Thoracic Surgery, Kanagawa Cancer Center, 2-3-2 Nakao, Asahi, Yokohama, Kanagawa, 241-8515, Japan;2. Department of Surgery, Yokohama City University, 3-9 Fukuura, Kanazawa, Yokohama, Kanagawa, 236-0004, Japan;3. Department of Pathology, Kanagawa Cancer Center, 2-3-2 Nakao, Asahi, Yokohama, Kanagawa, 241-8515, Japan;4. Department of Thoracic Oncology, Kanagawa Cancer Center, 2-3-2 Nakao, Asahi, Yokohama, Kanagawa, 241-8515, Japan;1. MN Chair in Pension Economics, University of Amsterdam, Netherlands;2. European Fiscal Board, Brussels, Belgium;3. CEPR, United Kingdom;4. CESifo, Germany;5. Tilburg University, Netherlands;6. University of Amsterdam, Netherlands;7. ASR Vermogensbeheer, Netherlands;1. Department of Surgical Oncology, Hiroshima University, Hiroshima, Japan;2. Department of Surgery, Tokyo Medical University, Tokyo, Japan;3. Department of Thoracic Surgery, Kanagawa Cancer Center, Yokohama, Japan;1. School of Finance, Southwestern University of Finance and Economics, China;2. Department of Industrial and Manufacturing Systems Engineering, The University of Hong Kong, Hong Kong Special Administrative Region;3. School of Business, The University of Hong Kong, Hong Kong Special Administrative Region |
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| Abstract: | We estimate a DSGE model with (S,s) inventory policies. We find that (i) taking inventories into account can significantly improve the empirical fit of DSGE models in matching the standard business-cycle moments (in addition to explaining inventory fluctuations); (ii) (S,s) inventory policies can significantly amplify aggregate output fluctuations, in contrast to the findings of the recent general-equilibrium inventory literature; and (iii) aggregate demand shocks become more important than technology shocks in explaining the business cycle once inventories are incorporated into the model. An independent contribution of our paper is that we develop a solution method for analytically solving (S,s) inventory policies in general equilibrium models with heterogeneous firms and a large aggregate state space, and we illustrate how standard log-linearization methods can be used to solve various versions of our inventory model, generate impulse response functions, and estimate the model?s deep structural parameters. |
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| Keywords: | (S s) inventories policy State-dependent decisions Heterogeneous-agent models Perturbation methods |
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