skip to content

Faculty of Economics

Journal Cover

Katsuyuki, S. and Chadha, J.S.

Inventories and the stockout constraint in general equilibrium

The B.E. Journal of Macroeconomics

Vol. 14(1) pp. 27-74 (2014)

Abstract: 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.

Keywords: Dynamic stochastic general equilibrium, Great moderation, Inventory cycle, Inventory investment, Stockout constraint

JEL Codes: E13, E20, E32

Author links:

Publisher's Link: http://www.degruyter.com/view/j/bejm.2014.14.issue-1/bejm-2012-0138/bejm-2012-0138.xml



Papers and Publications



Recent Publications


Fruehwirth, J., Iyer, S. and Zhang, A. Religion and Depression in Adolescence Journal of Political Economy [2019]

Carvalho, V. M. and Grassi, B. Large Firm Dynamics and the Business Cycle American Economic Review [2019]

Erdil, A. and Kumano, T. Efficiency and stability under substitutable priorities with ties Journal of Economic Theory [2019]

Corsetti, G., Mavroeidi, E., Thwaites, G. and Wolf, M. Step away from the zero lower bound: small open economies in a world of secular stagnation Journal of International Economics [2019]