Inventories, business cycles, and variable capital utilization

Lucas M. Engelhardt 1
  • 1 Assistant Professor, Department of Economics, Kent State University, Stark Campus, 6000 Frank Ave NW, North Canton, Ohio 44720, USA
Lucas M. Engelhardt

Abstract

Bils and Kahn [Bils, M., and J. A. Kahn. 2000. “What Inventory Behavior Tells us about Business Cycles.” American Economic Review 90, 458–481.] conjectured that a competitive technology-driven business cycle model could not generate countercyclical inventory-sales ratios. Khan and Thomas [Khan, A., and J. Thomas. 2007a. “Explaining Inventories: A Business Cycle Assessment of the Stockout Avoidance and (s,s) Motives.” Macroeconomic Dynamics 11(5): 638–664. Khan, A., and J. K. Thomas. 2007b. “Inventories and the Business Cycle: An Equilibrium Analysis of (s,s) Policies.” American Economic Review 94(4): 1165–1188.] developed a model that disproved this conjecture. However, as this paper shows, that model underperforms a baseline model without inventories for many important moments. However, when variable utilization is added to the model, many of these moments perform better in the full model than in the baseline. The results suggest important interactions between variable utilization and inventory dynamics.

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