Inventory behavior with permanent sales shocks |
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| Institution: | 1. DG Macro-Prudential Policy & Financial Stability, Financial Stability Surveillance, European Central Bank, Germany;2. DG Research, Monetary Policy Research Division, European Central Bank, 60640 Frankfurt am Main, Germany;1. CUNEF, Leonardo Prieto Castro 2, 28040 Madrid, Spain;2. Bangor University, Hen Goleg, College Road, Bangor, LL57 2DG, United Kingdom;3. Funcas, C / Caballero de Gracia, 28, 28013 Madrid, Spain;4. University of Granada, Spain |
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| Abstract: | Empirically, ADF tests fail to reject the null hypothesis that sales are I(1). We build a model of inventory behavior that incorporates permanent sales shocks. Analytically, the model with I(1) sales implies that the variance ratio (of log production to log sales) is one in the long run, regardless of the strength of production smoothing, stockout avoidance, or cost shocks, but that, at business cycle horizons, the conditional variance ratio (conditional on past production and sales) is greater than one. We explain – analytically, using our model, and intuitively – four traditional inventory puzzles and three puzzles about inventories and monetary policy. |
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| Keywords: | Inventories Production smoothing Stockout avoidance Cointegration Monetary policy effects |
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