Inventory Dynamics and Business Cycles: What has Changed?

Abstract

To what extent can information-technology led improvements in inventory management account for the apparent moderation of economic fluctuations in the United States since the mid-1980s? We argue that changes in inventory dynamics played a reinforcing—rather than a leading—role in the reduction of output volatility. Since the mid-1980s, inventory dynamics have changed in a manner consistent with a faster resolution of inventory imbalances. However, these changes appear to be a consequence of changes in the response of industry-level sales and aggregate economic activity to monetary policy shocks. Our results suggest that it is the interaction between the changes in inventory behavior at the industry level and the macroeconomic environment—where the latter likely includes changes in the conduct of monetary policy and the responses of the economy to policy disturbances—rather than any single factor, that has contributed importantly to the observed decline in economic volatility.