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INPUT AND OUTPUT INVENTORIES IN GENERAL EQUILIBRIUM *
Author(s) -
Iacoviello Matteo,
Schiantarelli Fabio,
Schuh Scott
Publication year - 2011
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2011.00664.x
Subject(s) - inventory investment , volatility (finance) , economics , finished good , econometrics , general equilibrium theory , stochastic volatility , investment (military) , applied general equilibrium , production (economics) , microeconomics , politics , political science , law
We build and estimate a two‐sector dynamic stochastic general equilibrium model with two types of inventories: Input inventories facilitate the production of finished goods, output inventories yield utility services. The estimated model replicates the volatility and cyclicality of inventory investment and inventory‐to‐target ratios. Although inventories are an important element of the model’s propagation mechanism, shocks to inventory efficiency are not an important source of business cycles. When the model is estimated over two subperiods (pre‐ and post‐1984), changes in the volatility of inventory shocks or in structural parameters associated with inventories play a small role in reducing the volatility of output.