Abstract
This paper introduces demand uncertainty and inventory into a dynamic stochastic general equilibrium model. We assume that firms must predict demand before production. The purpose of this study is to investigate the effects of several exogenous shocks on the model economy in our settings. A numerical simulation using our model shows the following results. When shocks that raise expected demand are given, inventory stocks increase because output exceeds demand. In the next period, firms release the inventory stock, reducing excess stock and decreasing output. Thus, inventory adjustment causes recession. This result implies that cyclical movement (economic boom and bust) continues until variables return to the steady state. Furthermore, we confirm that our model can reproduce stylized facts for inventory movements and enhance empirical fit relative to the model without inventory.
Highlights
Economists often use variants of the Real Business Cycle (RBC) model introduced by Kydland and Prescott (1982) to explain business cycles
Incorporating inventory is a crucial feature of the proposed model because relatively few Dynamic Stochastic General Equilibrium (DSGE) models consider the movement of inventory stock, which is an important element for the business cycle
We developed a new Keynesian DSGE model that incorporates inventory stock in a fairly simple manner
Summary
Economists often use variants of the Real Business Cycle (RBC) model introduced by Kydland and Prescott (1982) to explain business cycles. This RBC model, with its various assumptions of market frictions (for example, price rigidity), has become a standard tool in macroeconomic analysis. Firms face demand uncertainty and have to predict the demand for their goods before production These predictions form the basis of the firms’ shipment decisions. With such demand uncertainty, inventory stock needs to be incorporated into the model to equalize the actual demand with sales. As Blinder and Maccini (1991) pointed out, Journal of Business Economics and Management, 2014, 15(4): 664–683
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
