Microeconomic Inventory Adjustment and Aggregate Dynamics

53 Pages Posted: 13 Dec 2005

See all articles by Jonathan McCarthy

Jonathan McCarthy

Federal Reserve Bank of New York - Research Department

Egon Zakrajsek

Bank for International Settlements (BIS)

Date Written: March 1999

Abstract

We examine microeconomic and aggregate inventory dynamics in the business sector of the U.S. economy. We employ high-frequency firm-level data and use an empirically tractable model, in which the aggregate dynamics are derived explicitly from the underlying microeconomic data. Our results show that the microeconomic adjustment function in both the manufacturing and trade sectors is nonlinear and asymmetric, results consistent with firms using (S,s)-type inventory policies. There are differences in the estimated adjustment functions between the two sectors as well as the durable and nondurable goods firms within each sector. The estimated adjustment function is remarkably stable across subperiods, indicating little change in the inventory adjustment process over time. As predicted by our model, higher moments of the cross-sectional distribution of inventory deviations affect aggregate inventory dynamics.

JEL Classification: D2, E2, E3

Suggested Citation

McCarthy, Jonathan and Zakrajsek, Egon, Microeconomic Inventory Adjustment and Aggregate Dynamics (March 1999). BIS Working Paper No. 63, FRB of New York Staff Report No. 54, Available at SSRN: https://ssrn.com/abstract=850069 or http://dx.doi.org/10.2139/ssrn.850069

Jonathan McCarthy (Contact Author)

Federal Reserve Bank of New York - Research Department ( email )

33 Liberty Street
New York, NY 10045
United States
(212) 720-5645 (Phone)
(212) 720-1844 (Fax)

Egon Zakrajsek

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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