Abstract
Aggregate inventory investment is invariably procyclical. This suggests that inventories play a destabilizing role in the economy as predicted by early Keynesian models of the business cycle. However, this behavior is believed to be inconsistent with the most prominent micro theory of inventories – the linear quadratic model. This is not the case. The linear quadratic model, when placed in a simple macro framework, can account for the procyclical behavior of inventory investment, even when the only shocks are independent demand shocks, inventory targets are independent of sales and individual firms adjust inventories slowly towards their target levels.
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.
