What do inventories tell us about news-driven business cycles?

There is widespread disagreement over the quantitative contribution of news shocks to business-cycle fluctuations. This paper provides a simple identifying restriction, based on inventory dynamics, that tightly pins down this contribution. Structural models predict that finished-good inventories sho...

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Bibliographic Details
Published in:Journal of monetary economics 2016-05, Vol.79, p.49-66
Main Authors: Crouzet, Nicolas, Oh, Hyunseung
Format: Article
Language:English
Subjects:
Business cycles
Finished goods
Intertemporal substitution
Inventories
Inventory management
Investment
News shocks
Restrictions
Studies
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Summary:There is widespread disagreement over the quantitative contribution of news shocks to business-cycle fluctuations. This paper provides a simple identifying restriction, based on inventory dynamics, that tightly pins down this contribution. Structural models predict that finished-good inventories should fall when there is an increase in consumption and investment induced by news shocks. A structural VAR with these sign restrictions indicates that news shocks account for at most 20 percent of output volatility. Since inventories comove positively with consumption and investment in the data, shocks that generate negative comovement cannot account for the bulk of fluctuations. •Good news about economic fundamentals should increase sales but reduce inventories.•This insight can be used in a sign-restricted VAR framework to identify news shocks.•The results suggest that such shocks contribute only modestly to business cycles.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2016.03.005