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Inventories and the Stockout Constraint in General Equilibrium

Shibayama, Katsuyuki, Chadha, Jagjit S. (2014) Inventories and the Stockout Constraint in General Equilibrium. The B.E. Journal of Macroeconomics: Topics, 14 (1). pp. 27-74. ISSN 2194-6116. E-ISSN 1935-1690. (doi:10.1515/bejm-2012-0138) (KAR id:42839)


We study the implications of a stockout constraint in a dynamic general equilibrium model, which can explain both standard business cycle and inventory facts. Under this constraint, inventories and demand are complements in generating sales, and hence the optimal level of inventories increases in expected demand. We show that the inventory to sales ratio is both persistent and countercyclical because the cost of carrying inventories is mainly determined by the interest rate. We use this model to disentangle output and sales, by matching the key inventory moments, and find that preference and productivity shocks are equally important in the data. Finally, we assess whether improvements in inventory management can explain the Great Moderation. We find that, although improvements in inventory management can reduce the need for inventory holdings, which decreases output volatility relative to sales volatility, lower levels of inventories actually increases sales volatility. Because these two effects offset each other, a change in inventory management does not change output volatility to any great extent.

Item Type: Article
DOI/Identification number: 10.1515/bejm-2012-0138
Uncontrolled keywords: Inventory investment, Inventory cycles, Stockout constraint,Great Moderation.
Subjects: H Social Sciences > HB Economic Theory
Divisions: Divisions > Division of Human and Social Sciences > School of Economics
Depositing User: Katsuyuki Shibayama
Date Deposited: 05 Sep 2014 13:43 UTC
Last Modified: 08 Dec 2022 22:40 UTC
Resource URI: (The current URI for this page, for reference purposes)

University of Kent Author Information

Shibayama, Katsuyuki.

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Chadha, Jagjit S..

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