Durable Goods Inventories and the Great Moderation

40 Pages Posted: 22 May 2008

See all articles by James A. Kahn

James A. Kahn

Yeshiva University; National Bureau of Economic Research (NBER)

Date Written: May 1, 2008

Abstract

This paper revisits the hypothesis that changes in inventory management were an important contributor to volatility reductions during the Great Moderation. It documents how changes in inventory behavior contributed to the stabilization of the U.S. economy within the durable goods sector, in particular, and develops a model of inventory behavior that is consistent with the key facts about volatility decline in that sector. The model is calibrated to evidence from survey data showing that lead times for materials orders in manufacturing shrank after the early 1980s. Simulations of the model show large reductions in the volatility of output growth and more modest reductions in the volatility of sales growth. In addition, the model addresses concerns raised by a number of researchers who criticize the inventory literature's focus on finished goods inventories, given that stocks of works-in-process and materials are actually larger and more volatile that those of finished goods. The model adapts the stockout-avoidance concept to a production-to-order setting and shows that much of the intuition and results regarding production volatility still apply.

Keywords: Great Moderation, inventories, volatility

JEL Classification: D21, E20, N12

Suggested Citation

Kahn, James A., Durable Goods Inventories and the Great Moderation (May 1, 2008). FRB of New York Staff Report No. 325, Available at SSRN: https://ssrn.com/abstract=1135806 or http://dx.doi.org/10.2139/ssrn.1135806

James A. Kahn (Contact Author)

Yeshiva University ( email )

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National Bureau of Economic Research (NBER)

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