The role of inventories and capacity utilization as shock absorbers |
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Affiliation: | 1. Texas A&M University, United States;2. Department of Economics, Universidad de Montevideo, Prudencio de Pena 2440, 11600 Montevideo, Uruguay;1. Department of Physics, Presidency College, Chennai 600005, India;2. Department of Physics, Panimalar Engineering College, Chennai 600123, India;1. Division of Thoracic Surgery, Department of Thoracic Surgical and Medical Oncology, National Cancer Institute, Pascale Foundation, IRCCS, Naples, Italy;2. Division of Anesthesiology, National Cancer Institute, Pascale Foundation, IRCCS, Naples, Italy;1. School of Optoelectronics Engineering, Xi’an Technological University, Xi’an, Shanxi 710032, China;2. School of Physical Science and Technology, Sichuan University, Chengdu, Sichuan 610064, China |
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Abstract: | We examine the role of inventories and capacity utilization (of both capital and labor) for the propagation of business cycle fluctuations. We document a new set of facts regarding the U.S. cyclical regularities of inventories and capacity utilization. First, we find that capital utilization and the flows of services from both capital and labor are procyclical, and comove with the holdings of inventories. Second, we find that labor utilization is procyclical as well, but is weakly negatively correlated with inventories. We build a model that accounts for these facts, and also accounts for the stylized inventory facts, i.e., inventory holdings are procyclical, while the inventory-to-sales ratio is countercyclical. The analysis is centered on the effects of two possible shocks: preference (demand) shocks and technology shocks. Our model shows that inventories and the rate of capital utilization are mostly complements, while inventories and the rate of labor utilization are mostly substitutes. It further shows that temporary demand shocks emphasize the role of inventories as being a “shock absorber,” whereas high-persistence demand shocks, as well as technology shocks of any persistence, emphasize the role of inventories as being a complement to consumption. |
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Keywords: | Inventories Capital utilization Labor intensity Business cycle |
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