Inventory Shocks and the Great Moderation

Morley, James and Singh, Aarti (2016) Inventory Shocks and the Great Moderation. Journal of Money, Credit and Banking, 48 (4). pp. 699-728. ISSN 0022-2879

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Abstract

Why did the volatility of U.S. real GDP decline by more than the volatility of final sales with the Great Moderation in the mid‐1980s? One explanation is that firms shifted their inventory behavior toward a greater emphasis on production smoothing. We investigate the role of inventories in the Great Moderation by estimating an unobserved components model that identifies inventory and sales shocks and their propagation in the aggregate data. Our estimates provide no support for increased production smoothing. Instead, smaller transitory inventory shocks are responsible for the excess volatility reduction in output compared to sales. These shocks behave like informational errors related to production that must be set in advance and their reduction also helps explain the changed forecasting role of inventories since the mid‐1980s. Our findings provide an optimistic prognosis for a continuation of the Great Moderation, despite the dramatic movements in output during the recent economic crisis.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Money, Credit and Banking
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1400/1402
Subjects:
ID Code:
130433
Deposited By:
Deposited On:
15 Jan 2019 16:15
Refereed?:
Yes
Published?:
Published
Last Modified:
12 Aug 2020 08:27